Archive for April 2021


Tyler’s test now has an answer

In January 2015, the Swiss made the foolish decision to allow the franc to appreciate strongly, ending a highly successful 3 1/2 year peg with the euro. The Danish krone was also pegged to the euro, and came under intense pressure from speculators. The Financial Times had this to say at the time:

It’s been a long time since so many developed central banks were tested by free market forces. And free market forces aren’t finished yet.

Hot on the heels of the SNB giving up on its euro ceiling policy, the market is zoning in on the Danish central bank and its ability to maintain its euro-peg.

As Dan already pointed out, the Danes have had to cut rates three times in in the last two weeks: January 19, January 22 and January 29.

If that looks and feels desperate, perhaps that’s because it is?

After discussing speculators buying the krone, the FT suggested:

All that, say the analysts, increasingly puts the Danes in the position of the Swiss National Bank: having to gobble up euro-assets they may not want or care for.

The economics world is divided up into two groups. Mainstream economists believe the Swiss National Bank (SNB) was having to buy so many assets because of its weak franc policy, and that allowing the franc to appreciate would reduce this problem, allowing them to buy fewer assets. Many suspected that the Danish central bank would eventually be forced to follow suit.

I argued that this was exactly backwards. A strong franc policy merely whets the appetite of speculators, and the franc is popular partly because speculators correctly anticipate that it will gradually appreciate over the long run. If you don’t like having to “gobble up” so many euro assets, the right policy is to maintain the peg, not allow the franc to appreciate.

At roughly the same time, Tyler Cowen had this to say:

And if the Danes cut their peg, I am loathe to call this [Swiss franc appreciation] a “mistake” (even though it likely will hurt their economy), rather it would be an inevitability.

After more than 6 years, we have a pretty definitive answer to Tyler’s test. It wasn’t inevitable. The Danes did not allow the krone to appreciate. As a result, after a brief surge in early 2015 their central bank balance sheet returned to normal:

Switzerland didn’t do nearly as well. Their monetary base soared right before the revaluation, as markets anticipated that the SNB was about to allow the franc to appreciate, and then continued to grow over time. Countries with the lowest inflation rates (Switzerland, Japan, etc.) tend to have the largest central bank balance sheets.

I’ve talked about this issue before, and long time readers might think I’m beating a dead horse. But I find it maddening that the conventional wisdom still seems to assume that the SNB was forced to revalue the franc under speculative pressure back in 2015. This feeds into the (false) perception that central banks are powerless to inflate, that Lars Svensson’s “foolproof” way of escaping the liquidity trap won’t work. And that’s just wrong. Central banks are never unable to depreciate their currencies.

When people have their minds made up, no amount of empirical evidence seems to budge them.

PS. Ever meet someone who worries about countries engaging in competitive devaluations, and yet also believes that monetary policy doesn’t have any effect on inflation? If monetary policy is powerless, then how can a central bank devalue its currency?

India: A Wounded Civilization

India has made a lot of progress in the years since V.S Naipaul wrote India: A Wounded Civilization in 1977. But three recent articles in The Economist demonstrate that, at least in a political sense, India is moving in the same direction as China.

Recall how Xi Jinping responded to Hong Kong election outcomes that he did not like by abolishing the (very limited) democracy in that city-state. Now India’s central government has done the same with New Delhi:

When Narendra Modi, India’s prime minister, stripped Kashmir of its statehood in 2019, most Indians cheered. . . .

Pratap Bhanu Mehta, an academic and columnist for the Indian Express, a national newspaper, was one of the few to raise misgivings. A government that gleefully twisted the law and suspended local democracy in one place could surely do the same in another. Mr Modi proposed to “Indianise” Kashmir, noted Mr Mehta. “Instead, what we will see is potentially the Kashmirisation of India.”

Sooner and closer to home than anyone expected, Mr Mehta’s prediction has come to pass. On March 22nd Mr Modi’s Bharatiya Janata Party (BJP) rushed a bill through the lower house of parliament to strip the elected government of Delhi, the capital, of much of its power and hand this instead to the lieutenant-governor, an official who represents the central government. 

Freedom of speech is also taking a beating:

Despite running what is often hailed as the world’s biggest democracy, [India] has gained a taste for curtailing freedom before speech.

Just ask Siddique Kappan, a journalist who has been detained since October under the Unlawful Activities Prevention Act. His sin was to have been caught driving towards Hathras, a district in the state of Uttar Pradesh. Other reporters had gathered there to cover the alleged gang rape and murder of a Dalit woman by upper-caste men. Mr Kappan never reached the village of the 19-year-old victim, whose family assert that state police sided with her alleged killers, to the point of seizing and cremating her brutalised corpse to conceal the evidence. On the defensive, police have claimed a wider conspiracy to cause caste conflict. They accuse Mr Kappan, arrested at a highway toll booth, of “intent” to stir up trouble of this sort.

Human rights in India’s villages (where most of its people live) are appallingly bad. But things are also getting worse in the universities:

In another move to pre-empt open discussion of touchy issues, the foreign ministry has imposed new rules on academic conferences. In addition to the existing, stringent scrutiny of foreigners invited to conventional events, it will now require state-run institutes and universities to seek prior permission from the ministry for any online conference or seminar “clearly related to India’s internal matters”. Professors may soon find it harder to travel abroad, too. Police in the state of Uttarakhand have announced that henceforth, anyone they deem to have posted “anti-national” content on the internet will not get a passport. Not to be outdone, police in Bihar say that anyone who joins a protest can forget ever having a government job or contract—a jarring rule in a country that won independence through peaceful protest.

The article also details how the internet is being selectively shutdown to prevent protesters from organizing, again a technique pioneered in Kashmir. Kashmir is to India what Xinjiang is to China. The parallels are increasingly frightening.

A third article points out that India’s police are active participants in Modi’s anti-Muslim policies. It also explained that Modi’s virulent Hindu nationalism has deep roots:

It is a shame that India, as a republic, increasingly seems to set aside its own original and excellent toolkit, namely its constitution of 1950. The divergence has been a long and slow process, but there is little doubt it is speeding up. One hint as to why may have been revealed by the culture ministry, which on February 19th, for the first time ever, issued an official tribute to “The Profound Thinker” M.S. Golwalkar, an early leader of the Rashtriya Swayamsevak Sangh or rss, the mothership of the Hindu nationalist movement and progenitor of the BJP. Among other controversial views, Mr Golwalkar believed that Nazi Germany’s management of its Jewish problem “represented a good lesson for us in Hindustan to learn and profit by”. He was not happy with India’s constitution either, judging its makers “not firmly rooted in the conviction of our single homogeneous nationhood”. His call for a change of toolkit has found a powerful audience.

As soon as next year India may surpass China in population. After a few more decades, the gap will grow to hundreds of millions of people. Let’s hope the world’s largest democracy doesn’t become the world’s largest dictatorship.

How news affects markets

Tyler Cowen linked to a new NBER study by Scott R. Baker, Nicholas Bloom, Steven J. Davis, and Marco C. Sammon, which looks at the response of asset prices to various types of news. Here I’ll discuss the paper’s abstract:

We examine next-day newspaper accounts of large daily jumps in 16 national stock markets to assess their proximate cause, clarity as to cause, and the geographic source of the market-moving news. Our sample of 6,200 market jumps yields several findings. First, policy news – mainly associated with monetary policy and government spending – triggers a greater share of upward than downward jumps in all countries.

I’m not surprised that monetary policy is important, or that the effects are asymmetric. While one can find occasional examples of markets falling sharply on monetary policy announcements, as in December 2007, major changes are usually in the upward direction. This is because bad monetary policy generally involves errors of omission—the central bank fails to adjust its policy rate when the natural rate of interest is falling (as in mid-2008.) When the central bank does make a major move, it generally helps the situation. The problem, of course, is that central banks are too passive; too unwilling to move when economic conditions change.

Second, the policy share of upward jumps is inversely related to stock market performance in the preceding three months. This pattern strengthens in the postwar period.

Beneficial policy adjustments are less likely to occur if the economy (and the markets) has previously been doing well.

Third, market volatility is much lower after jumps triggered by monetary policy news than after other jumps, unconditionally and conditional on past volatility and other controls. Fourth, greater clarity as to jump reason also foreshadows lower volatility.

A monetary policy announcement often helps to clarify the situation. Other shocks, such as the failure of Lehman Brothers, make the situation even more confusing.

Clarity in this sense has trended upwards over the past century.

When I studied monetary policy in the 1930s monetary policy, I noticed that the policy environment was far more unstable than today, and also that the stock market was far more volatile than today. The average daily move in the DJIA was around 2%.

Finally, and excluding U.S. jumps, leading newspapers attribute one-third of jumps in their own national stock markets to developments that originate in or relate to the United States. The U.S. role in this regard dwarfs that of Europe and China.

This fits in with David Beckworth’s claim that the Fed is a monetary superpower due to the dollar’s role in the global economy. (Eurozone GDP is similar in size to the US GDP, but the ECB is far less influential.)

PS. There are schools of thought on both the left and the right that claim monetary policy doesn’t matter, that it’s just swapping base money for T-bills. They have no explanation for these empirical facts, and presumably either deny them or ignore them.

A very scary headline

This Bloomberg headline doesn’t look very promising:

SALT-Cap Repeal Gains Momentum With House Bipartisan Caucus

It”s hard to think of any plausible legislative action that would be worse—a huge tax cut going mostly to people making over $1,000,000/ year, which also somehow makes the economy less efficient. Oh, and it would give me headaches (not that anyone cares), as I’d have to go back to itemizing all my deductions instead of taking the standard deduction. And it would encourage state and local governments to spend money on wasteful boondoggles that don’t make sense on a cost/benefit basis.

Repeal of the SALT cap would undo one of the few helpful policy reforms of the Trump era. It would also confirm that the Biden administration is not serious about trying to improve the economy.

Eventually, the lost revenue would have to be recouped somewhere else. I doubt it will be through spending cuts; more likely Biden will have to raise taxes on average people. How long before they start discussing a VAT?

Of course some progressives will say that no one has to pay. We’ll just keep borrowing money for this and all the other shiny new toys coming out of Congress. No one has to pay for any of it.

The woke embrace white identity

Razib Khan has an excellent post discussing the recent trend of woke private schools setting up white affinity groups:

But the real problem I have is the white affinity groups. I am not happy with the “people of color” affinity groups either, but in some way, these have been around since the 1960’s. The emergence of white affinity groups seems a nod to the re-racialization of society as the explicit text. The fundamental issue is simple: I do not want white people to think about their race. I do not want white people to think of themselves in racial terms. The history of white Americans thinking in racialized terms is not good for people who look like me. These fools are going to get us killed!

Taking activists who are nonwhite at their word rather than self-interest, they believe white examination and embrace of their racial identity will allow for true anti-racism and justice. My rejoinder is simple: you put far too much faith in the innate goodness of these white people. My wife’s grandparents were good people, yes, but I know for a fact they were opposed to integration. They were good people, but of their time. Most people conform and follow the spirit of the times. Don’t tempt fate to think you can tame the snake of racial identity. It’s evil among all races and all people. It is always with us, but it is sin. As a brown-skinned minority in a majority-white country, I do not want white people to think in racial terms.

Read the whole thing.

It’s a bit depressing when minority groups engage in identity politics. It’s downright scary when the majority group does so.