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Markets in Everything: The PAM Rides Again

Remember the Pentagon’s ill-fated Policy Analysis Market?  Intrade is now offering a contract on the timing of US air strikes against states sponsoring terrorism:

The contract will be expired at 100 if the USA officially launch and execute an overt Air Strike against land facilities in any of the listed countries on or before June 30, 2005.

The countries involved and currently listed as States known to sponsor terrorism are: Cuba, Iran, Libya, North Korea, Sudan & Syria.  Only these six countries count for expiry purposes. An overt Air Strike against a land facility will be defined as an air attack officially announced by the Pentagon or the US Department of Defense. It will not include any covert operations, accidental border clash, etc. The contract will be paused and subsequently expired once such an attack has been reported to have taken place against a land facility in any of the named countries.

The contract has yet to trade, but market depth is pointing to an implied probability in the low teens.  This contract would have been more informative if it were based on individual countries, rather than such a disparate group.

posted on 23 February 2005 by skirchner in Economics, Economics/Financial Markets

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Steve Hanke’s Currency Board Fetish

Steve Hanke is nothing if not consistent.  His fetish for currency boards seems to have spilled over into a love of almost any fixed exchange rate regime.  He even has the audacity to call the proponents of greater exchange rate flexibility in East Asia mercantilists. 

Hanke’s defence of HK’s currency board relies on financial instability that occurred more than 20 years ago.  The costs HK’s currency board has imposed on its economy in recent years are completely ignored (Singapore has done relatively better because of its more flexible approach to exchange rate management).

In relation to Japan, Hanke maintains:

Japan has been under mercantilist pressure, primarily from the U.S., to ratchet up the yen’s value against the dollar. Tokyo has complied. Consequently, the economy has suffered from strong-yen-induced recessions and hasn’t yet recovered from the enormous deflation of the 1990s. And the mercantilists in the U.S. remain agitated because Japan continues to register large trade surpluses.

Hanke has things exactly backwards.  Japan has not seen a yen-induced recession since 1985-6.  It has been Japan’s mercantilist attempts at resisting the secular appreciation of the yen, by laundering its massive current account surpluses through USD asset markets, that has landed its economy with a massive overhang of excess capacity.  China risks suffering the same fate, especially if its demographics ultimately turn as toxic as those of Japan.

Given the terrible havoc fixed exchange rate regimes have wrought in emerging market economies in recent years, and within the euro zone, it is incredible that anyone still defends them.  It is even more incredible that these hold-outs for Bretton Woods-era monetary regimes can still find a home within classical liberal think tanks.

posted on 18 February 2005 by skirchner in Economics/Financial Markets

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Affiliate News

Affiliate relationships are an important source of support for Institutional Economics, so we will occasionally highlight special offers from affiliate sites.  Elliott Wave International is currently offering some of its services for free for a limited time.

To anticipate the inevitable criticism of technical analysis, I think the efficient markets hypothesis and technical analysis can be reconciled, once we allow for bounded rationality and transaction and information costs.  In this context, the existence of historical dependencies in financial market prices and other market anomalies become readily explicable.  Far from being an illustration of the ‘irrationality’ of markets, such dependencies are an illustration of the essential role markets play as discovery processes in a world that is far from frictionless.

posted on 11 February 2005 by skirchner in Economics/Financial Markets

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