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2005 11

Betting Against Themselves:  Buffett, Gates and the Dollar

The AEI’s John Makin has put together a surprisingly good piece on the US dollar, which begins with an amusing comparison with George W Bush:

Why is the dollar like a Republican president? Answer: Because the dollar faces incessant predictions of imminent collapse, but in the end it wins out over weaker alternatives.

Weighing up the fundamental determinants of exchange rates, Makin argues that ‘it is surprising that the dollar has not risen further.’  He also highlights the absurdity underlying the doomsday cultism of Buffett and Gates:

America’s two richest men, Bill Gates and Warren Buffett, are losing hundreds of millions of dollars having bet against the dollar on the premise that rising U.S. current-account and budget deficits would have to weaken it. Maybe these two remarkable men should have pondered a little more the question of whether they could have become multibillionaires in Europe or Japan, where the environment for growth and innovation is far less friendly and the underlying vigor of the economy is less conducive to a strong currency. Beyond that, I guess they did not notice that the budget deficits and government debt are considerably larger in Europe and Japan than they are in America. Betting against the dollar meant that Gates and Buffett were betting against themselves. I can’t see why they would want to do that.

posted on 29 November 2005 by skirchner in Economics

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The Gerard Affair and RBA Governance

Most columnists are, rather predictably, analysing the Gerard Affair purely in party political terms.  The AFR’s ‘special investigation’ published yesterday never thought to question the significance of the Gerard matter for RBA governance, instead couching it solely in terms of the Treasurer’s political judgement.  Alan Wood is the stand-out exception in appreciating the affair’s real significance in exposing the antiquated model of monetary policy governance that has been allowed to persist in Australia, which has its roots in the class warfare of the 1920s and 30s:

under the Reserve Bank Act there are no grounds for dismissing Gerard. Whether he has breached the Reserve Bank’s code of conduct for board members, published last year, is another matter.

The code was established because, as its preamble explains, the Reserve Bank Act says little about the conduct of board members. The preamble also says that board members recognise their responsibility for maintaining “an unparalleled reputation for integrity and propriety in all respects” in agreeing to the code.

Under the heading General Principles, the code states that board members will avoid any action, or inaction, that compromises the bank’s standing in the community and its reputation for integrity, fairness, honesty and independence.

There is no question of Gerard behaving improperly in carrying out his duties as a board member or compromising the RBA’s independence. But if the tax office documents cited by Monday’s Australian Financial Review, alleging that tax investigators were misled, are confirmed as accurate, Gerard would appear to be in breach of the code.

The fact that his actions predated the code and his appointment to the board does not necessarily mitigate the harm that revelations of his conduct could cause later. It would be interesting to hear the uncensored opinions of his fellow board members on whether his behaviour has injured the board’s standing.

However, as with most codes of conduct, there is no penalty for a breach. It is up to Gerard to decide whether he should resign to avoid any risk of damage to the board’s reputation.

Whatever his decision, it has raised again the vexed question of whether the existing RBA board arrangements are adequate.

Curiously, the Gerard Affair also seems to have prompted a change of view on the part of UQ’s Stephen Bell, the author of the most comprehensive study of the RBA to date (which I review here).  Bell is quoted in the SMH as saying:

It makes the case stronger to stick more professionals … who don’t have shady deals in the business sector and who can contribute more to meetings.

This is surprising given the rather uncritical endorsement Bell gave to the current governance arrangements for the Bank in his book, although no less welcome for that.

posted on 29 November 2005 by skirchner

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‘Bubble’ Collectibles

The contrarian in me thinks that when ‘bubbles’ have become collectible kitsch, we are well beyond the point of having to take alleged asset price ‘bubbles’ seriously!

posted on 29 November 2005 by skirchner in Economics

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RBA Governance

Robert Gerard’s main qualification for serving on the RBA Board were his contributions to the Liberal Party in South Australia.  It now also seems that being involved in a dispute with the Australian Taxation Office, which falls within the Treasury portfolio, is no disqualification to being appointed to the Board:

Adelaide businessman Robert Gerard was appointed to the RBA board in March 2003.

The appointment came as Mr Gerard, who owns the family business Gerard Industries, was fighting the Australian Tax Office (ATO) over a Caribbean tax haven deal described as tax evasion.

A $150-million settlement in 2003 ended a 14-year investigation, that came after Mr Gerard’s appointment was taken to Cabinet by Treasurer Peter Costello.

Mr Gerard says he told Mr Costello about his ATO dispute before his appointment, and the Treasurer later contacted him and said he had no problem with him being on the board.

This has the federal opposition calling for an inquiry, but it is hardly the first time the business interests of an RBA Board member have been the cause of controversy.  Anyone remember Solomon Lew and Yannon?  Solomon Lew was one of the few outside appointments to the RBA Board not to serve a second term after the Yannon affair blew-up half way through his five year term.

As suggested in previous posts, the problem with the RBA Board is not so much the inevitably political nature of the appointments, but the many hats and potential conflicts of interest that some appointees bring to the Board table.  The RBA’s efforts before the Administrative Appeals Tribunal to suppress the release of the minutes of Board meetings effectively acknowledges these conflicts.  The setting of monetary policy should be kept separate from the other governance functions of the Bank and placed in the hands of a full-time committee of monetary policy experts, with substantial representation from outside the Bank.

posted on 29 November 2005 by skirchner in Economics

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Future Fund Chairman David Murray:  ‘The Money Belongs to the Government’

Inaugural Chairman of the Future Fund David Murray makes things perfectly plain in this interview with the Australian.  The money in the Fund belongs to the government and it will do with it as it pleases:

the former chief executive of the Commonwealth Bank made it clear he did not see the fund operating at arm’s length from government like the Reserve Bank…

“The money doesn’t belong to the people in the fund, it belongs to the government and the community,” he said. “It has to be managed according to the direction of government…

“The Government has the right to determine what it does on behalf of the taxpayers in the community.”

Mr Murray said he was enthusiastic about accepting the offer to chair the Future Fund, as it was “well suited to my own approach”. “I believe very strongly in the concept of intergenerational equity,” he said.

“I believe in the community being good at saving and investing in the future.”

The Future Fund is based on the premise that the national saving task implied by an aging population should be met by the government setting itself up as an inter-generational financial intermediary, with the result that financial markets are partially nationalised by the Fund.  Does anyone seriously believe that a fund subject to direction by government will do a better job ‘saving and investing in the future’ than individuals?

posted on 27 November 2005 by skirchner in Economics

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Myths of the Adjustment Process

Woody Brock’s February 2004 paper on the relationship between US interest rates and the big dollar is a neat debunking of much of the conventional wisdom on this subject:

•  If foreigners become disenchanted with US assets, and demand higher yields, can they get them? [No, other things being equal.]

• Can foreigners as a whole “pull out” their money from the US, thus driving up US real rates? [No.]

• Can foreigners as a whole refuse to acquire more US assets in the future (in order to finance future US trade deficits) thus driving up US interest rates? [No.]

• As the dollar falls, will the US experience a dose of “imported inflation”, thus driving up nominal interest rates? [Yes, but less than ever before due to structural changes in the global economy.]

• Can Asian central banks stop acquiring US IOUs? [Yes.] And if so, would this development send US interest rates soaring as the consensus expects? [No, the value of the dollar would take the hit much more than US yields.]

• How much more will the dollar fall before a new and more stable equilibrium can be achieved - an equilibrium including a balanced US trade account? [Much more than it has - largely because the value of the dollar has not been the cause of today’s trade imbalances.]

Woody greatly overstates the likely exchange rate adjustment in my view (eg, AUD-USD above parity,* a 300% revaluation in the yuan), but his analysis of the irrelevance of this process to the determination of US interest rates is essentially correct.


*  Afterall, Australia has its own record current account deficit, for which a similar adjustment process is required.

posted on 26 November 2005 by skirchner in Economics

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Give Away Telstra

You might not recommend Telstra shares to your mother, but few Mums and Dads would say no to them if they were given away for free.  In today’s Australian, Terry McCrann (no link) is once again arguing for Telstra to be given away rather than sold.  With a $14 billion surplus looming in the Mid-Year Economic and Fiscal Outlook, the argument for privatising Telstra by lot seems more compelling than ever.  The government has effectively conceded it does not need the money by undertaking to place the proceeds from privatisation into a Future Fund, along with part of the budget surplus, where these funds will be used to buy other financial assets.  These assets are supposed to provide a revenue stream to fund future expenditures, but there is no real difference between meeting these expenditures out of current or future revenue.

Empowering individuals to provide for their own future needs by endowing them with financial assets is much less problematic than the government setting itself up as an inter-generational financial intermediary.  I have long argued that that any proceeds from the sale of Telstra should be rebated directly to the private superannuation accounts that every working Australian already owns.  Giving away the government’s remaining equity in Telstra amounts to much the same thing.

posted on 26 November 2005 by skirchner in Economics

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Prediction Markets Summit

Details of the Prediction Markets Summit can be found here, along with some links to related blogs.

posted on 26 November 2005 by skirchner in Economics

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Costello’s Billions

Speculation is mounting that the Mid-Year Economic & Fiscal Outlook could report a budget surplus as high as $14 billion.  This is bound to give added impetus to proposals for further tax reform, with major changes to the tax system now readily affordable, even within the confines of the surplus.

The actual release date for the MYEFO remains as illusive as ever.  As in previous years, the Treasurer will release the document at his own convenience, often with minimal notice.  The government’s failure to adhere to a simple timetable for the release of important budget documents says a great deal about the low standards for fiscal transparency and accountability at a federal level.

posted on 23 November 2005 by skirchner in Economics

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Shameless Protectionism

Protectionism is rarely as cynical and opportunistic as this:

Prominent Liberal backbencher Bruce Baird said the Government should take 25-year-old Nguyen’s execution into consideration during negotiations with Singapore Airlines over a share of the lucrative Australia-US air route.

The Government is expected to make a decision shortly on granting the airline, owned by the Singapore government, access to the route from which Qantas makes much of its profit.

Mr Baird, who heads the parliamentary amnesty group, told ABC radio that while clemency for Nguyen should not be a condition of a Singapore Airlines deal, it should be a consideration.

“I’m not saying it should be made a condition I just think it is one of the issues that should be taken into consideration because we have made a number of requests to them to consider our position, we have no death penalty in this country so they are out of step in terms of other developed countries and imposing the death penalty,” he said.

The story neglects to mention Baird is also a member of the parliamentary Friends of Tourism group and that his electorate includes Sydney Airport.

posted on 23 November 2005 by skirchner in Economics

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Brad & Nouriel, Take Note

Ben Bernanke’s response to questions from Senator Bunning:

Concerns have been raised that the quantities of U.S. Treasury securities held by China
and other foreign investors, both private and official, have become so large as to increase the vulnerability of the U.S. economy to changes in the portfolio allocations of those investors.  However, many of the reasons that investors hold these securities—their unparalleled safety and liquidity, together with the dollar’s traditional role as a reserve currency—are unlikely to disappear any time soon. Moreover, markets for dollar-denominated financial assets are extraordinarily deep; for example, foreign official holdings of U.S. Treasuries, of which holdings by China represent only a part, collectively account for only three percent of total U.S. credit market debt outstanding. Accordingly, U.S. financial markets would likely be able to absorb a significant shift in foreign official demands for U.S. debt, including by China.

posted on 23 November 2005 by skirchner in Economics

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Inflation Targeting and the Fed

Mark Thoma points to a piece in the FT by Peter Hartcher, criticising Ben Bernanke for his focus on inflation targeting at the expense of targeting asset prices.  My review of Hartcher’s book, Bubble Man, explains why Bernanke is right and Hartcher is wrong:

Hartcher never ventures to suggest by how much the Fed should have tightened over this period.  Instead, he quotes Fed research on the elasticity of stock prices to Fed funds rate shocks contained in a 2003 speech by then Federal Reserve Board Governor Ben Bernanke.  In this context, Hartcher says that the idea that ‘monetary policy has a strong influence over the market…is supported by all the evidence from within the Fed itself’ (p. 151).  Hartcher neglects to mention that the rest of Bernanke’s speech is in fact a compelling review of the theory and evidence against the proposition that monetary policy should respond to asset prices, citing no less than 20 academic papers and other sources on the subject.  In particular, Bernanke summarises his argument by noting that ‘monetary policy can lower stock values only to the extent that it weakens the broader economy, and in particular that it makes households considerably worse off.  Indeed, according to our analysis, policy would have to weaken the general economy quite significantly to obtain a large decline in stock prices.’

posted on 22 November 2005 by skirchner in Economics

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RBA Governance

The federal government will need to make three appointments to the RBA Board between now and July next year, with the expiry of the current terms of Frank Lowy, Don McGauchie and Warwick McKibbin.  There is speculation that former federal Treasurer of the Liberal Party and Fairfax Chairman Ron Walker might be appointed to the Board.  Needless to say, this has the opposition fretting for the independence of the Bank:

Opposition treasury spokesman Wayne Swan said Mr Costello should rule out making Mr Walker one of the board’s members, who earn around $50,000 a year for their services.

He said appointing Mr Walker would undermine the independence of the board. “We simply cannot let one of the most important and sensitive organisations in Australia be compromised in this way by becoming a plaything for friends of the Howard government,” Mr Swan said in a statement.

“An independent Reserve Bank board is fundamental to sound economic management and stability, and should not be treated as a destination for Liberal Party mates or a payback for services rendered to the coalition.”

The precedent for political appointments to the Board was set long ago and concerns for the independence of the Bank in opposition are rarely sustained by governing parties.  When Qantas was still in public ownership, it was said that the Qantas Board was like the House of Lords, a dumping ground for political patronage, and the RBA Board has not done much better under successive governments. 

The AAP story notes the McGauchie was appointed to ‘represent rural interests,’ reflecting his past affiliation with the National Farmers Federation, but also that his current role as Telstra Chairman routinely puts him in conflict with both the government and the ACCC.  The long-standing politicisation of the RBA Board is in many ways a secondary issue to the conflicts of interest inherent in the many hats some appointees bring to the Board table. 

This point was effectively conceded in affidavits lodged with the Administrative Appeals Tribunal in the RBA’s attempts to prevent News Ltd gaining access to Board minutes under Freedom of Information legislation, a process that was brought to an end when a conclusive certificate was issued.  This episode demonstrated that the current Board arrangements are simply incompatible with increased accountability and transparency on the part of the Bank.  In the absence of reform to the governance arrangements for Bank, the main qualification for most Board appointments will remain a lack of expertise in monetary policy.  The contrast with the candidates being considered to replace the two vacancies on the Fed Board of Governors (see previous post) is rather telling.

posted on 21 November 2005 by skirchner in Economics

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Fed Governance

The FT reports on possible candidates to fill the two vacancies on the Federal Reserve Board of Governors:

The White House is considering appointing business leaders, financial markets participants or experts in regulation to the board, according to two people familiar with the administration’s deliberations.

“It does not mean they will not end up picking two academic economists but they feel [they] have the flexibility to look more broadly,” one of the people said.

Candidates for the vacancies include Kevin Warsh, a member of the National Economic Council, a lawyer who previously worked in Morgan Stanley’s investment banking department. Paul McCulley, a Fed-watcher and portfolio manager at Pimco, the fixed-income investment manager, is said to be one of a number of names put forward by Mr Bernanke as chairman of the White House Council.

Among the academic economists under consideration, Richard Clarida, a professor at Columbia University, was a Treasury official in President George W. Bush’s first term and is now a consultant to Clinton Group, the hedge fund. Randall Kroszner, a professor at the University of Chicago’s graduate school of business, is an expert on banking, international finance and financial regulation and served on the Council of Economic Advisers during Mr Bush’s first term.

The White House declined to comment on candidates or the timing of the nominations. There are currently no academic economists on the board.

Both Clarida and Kroszner would be excellent appointments.  Appointing non-specialists with financial market backgrounds would be a mistake in my view, increasing the risk of the sort of regulatory capture by Wall Street that beset the US Treasury under Robert Rubin.

posted on 19 November 2005 by skirchner in Economics

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Incredulous Cultists

The latest data confirming record foreign demand for US assets and a decline in official sector purchases leaves the doomsday cultists simply incredulous:

if you believe the data, almost all the financing came from private investors abroad, who bought about $114 billion of US securities.  That total includes around $90 billion of long-term debt.  Corporate bonds were particularly popular.  Central banks only bought $4 billion.  I don’t believe that.

Brad is right to highlight the limitations of the TIC data.  However, given recent gains in the USD index to two year highs, a reduction in foreign official sector purchases should come as no surprise, since there is less pressure on the managed exchange rate regimes of foreign central banks.  There have even been suggestions that the Bank of Japan might soon intervene in foreign exchange markets to sell the USD.  I’m far from convinced that such intervention is imminent, but if the BoJ turned a net seller of USD assets, this would pose a serious challenge to the view that the US is in any meaningful sense dependent on foreign central bank purchases of USD assets.

posted on 16 November 2005 by skirchner in Economics

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The Productivity Commission Strikes Back

Assistant Productivity Commissioner Dean Parham strikes back at those who claim there have been no gains in productivity associated with microeconomic reform:

The ABS estimates reveal that, during the productivity cycle between 1993-94 and 1998-99, Australia’s annual rate of productivity growth was about half a percentage point above any other rate recorded and was nearly one percentage point above the long-term average. Clearly that was a dramatic rise.

A second issue is whether the higher productivity growth has disappeared. The ABS estimates put the average rate of growth between the productivity peaks in 1998-99 and 2003-04 at just below the average for the past four decades. This indeed indicates that growth is down from the ‘90s highs.

But some further digging into the data provides grounds to believe that the momentum in productivity growth did not disappear entirely. The key point is that there were some once-only factors at work - the Olympics, the GST, concerns about the Y2K bug - that dragged down the average for the cycle. While not a never-to-be-repeated factor, drought also reduced the average.

Australia’s underlying productivity growth in the 2000s has come off the exceptional highs of the ‘90s. However, if the effects of the once-off factors (if not drought) are discounted, average productivity growth during the latest cycle would still have been above the long-term average.

It should also be recalled that the relevant counter-factual in which there were no reforms is not being considered.  Even if Australia’s productivity performance were deemed to be poor, this does not preclude the possibility that this performance could have been even worse had no reform had taken place.

posted on 16 November 2005 by skirchner in Economics

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M3, the Fed and Inflation

David Altig weighs in on the Fed and M3, noting that:

From the point of view of a policy maker, why do we care about monetary measures in the first place? We care for the same reason everyone else does—because most of us still believe that, ultimately inflation, inflation is everywhere and always a monetary phenomenon.

There is robust cross-country empirical evidence for this proposition, but it is also easy to imagine situations in which tests for the long-run neutrality of money might fail due to permanent shocks to financial technology that disturb the velocity term in the quantity theory equation.  If these shocks are not modelled explicitly, then they could show up as a unit root process in the residual from a cointegrating specification involving money and inflation. 

An obvious example is Japan, where growth rates in base money in excess of 30% y/y have been observed alongside chronic deflation.  Contrary to popular belief, monetarists have long recognised the potential for non-neutralities involving money.  This does not mean that money is unimportant.  But it highlights the fact that, even in the long-run, there may not be a straightforward relationship between money and inflation that would warrant the rather simplistic interpretation often given to growth rates in monetary aggregates.

posted on 16 November 2005 by skirchner in Economics

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Buttonwood Makes a Virtue of Necessity

The Economist’s outgoing Buttonwood columnist tells her readers that money doesn’t matter after all, welcome news for any readers who might have actually read Buttonwood for investment advice rather than for the pointless personal anecdotes.

posted on 15 November 2005 by skirchner in Economics

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An Irrelevance Proposition for Current Account Deficits?

Alan Wood points to Australian Treasury and BIS papers that highlight the extent to which the official community remain appropriately relaxed on the issue of external imbalances:

Based on a paper by Guy Debelle from the Reserve Bank and Gabriele Galati from the Bank for International Settlements, they also note that the historical record does not appear to contain any industrial-country examples of large current account deficits or stocks of net foreign liabilities having caused domestic economic downturns.

Markets treat countries such as Australia, with well developed financial markets and an ability to borrow in their own currency, very differently from developing countries in Asia or Latin America. There is no evidence rising foreign debt has forced Australia to pay any significant risk premium on its foreign borrowings.

To stop our foreign debt rising from around its present level of 60 per cent of GDP will require Australia to run future trade surpluses of between 0.5per cent and 0.75 per cent of GDP, which Gruen and Sayegh describe as not too onerous an adjustment task. Nor is it likely to matter much if it rises a bit further before it stabilises.

The national fear of large current account deficits and foreign debt of the ‘80s has little relevance in the 21st century, as long as we continue to run good economic policies - including labour market reform.

I would go further and argue that these phobias have not had any relevance since the end of Bretton Woods in the early 1970s.

posted on 15 November 2005 by skirchner in Economics

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The US Current Account, Private Saving and Future Income Growth

An RBA Discussion Paper by Charles Engel, which looks at the sustainability of the US current account deficit in the context of future income growth, with some implications for USD bears:

In this paper we explore the role of one other factor that also has been mentioned prominently: private saving in the US is low because income growth is expected to be strong.

We rework the standard neoclassical two-country model to show how a country will be a net borrower when its future share of world GDP is expected to increase above its current share.

Our research ultimately is motivated by the question of whether the US current account is ‘sustainable’. The way we approach the question is to see whether the high level of US spending currently is compatible with an optimal path of borrowing. In particular, what assumptions about expected future growth of the US’s share of world output could justify its current account deficit? We show that if the deficit can be explained by higher future income shares, then the size of the real depreciation, that may otherwise be required to reduce the deficit, may be quite small.

posted on 14 November 2005 by skirchner in Economics

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What Do Money and Credit Aggregates Really Tell Us?

Barry Ritholtz is on the case in relation to the Fed’s decision to discontinue publication of the M3 aggregate.  As Barry notes, this is the sort of thing that excites the tin foil hat brigade and fever-swamp Austrians, but I would suggest that there is a rather innocent explanation.  Growth rates in broad money and credit aggregates tend to be dominated by trends in financial intermediation and thus have only a very tenuous relationship with monetary policy and even a somewhat loose relationship with economic activity.  There is in fact no necessary connection between a central bank’s targeting of an official interest rate and changes in the money supply, although there is often a link in practice under current central bank operating procedures.  Even under a system of free banking in which the money supply was market-determined, a central bank could still independently target an official interest rate (see Michael Woodford’s Interest and Prices for a more formal argument in this regard).

I’m much more sympathetic than most economists to the idea that money matters.  Base money arguably has a neglected role in monetary policy transmission that is independent of the official interest rate and some of that role may also be reflected in broad money aggregates.  However, it is mistake to interpret broad money and credit aggregates as being predominantly a function of exogenous monetary policy decisions.  They have a much stronger relationship with individual portfolio choices and innovations in financial technology, in other words, capitalist acts between consenting adults.  When the fever-swamp Austrians point to growth in these aggregates as being symptomatic of the supposed monetary depredations of the Fed, they are inadvertently condemning what are largely market-determined outcomes in relation to financial intermediation.

posted on 14 November 2005 by skirchner in Economics

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The Dismissal: Get Over It

Today is the 30th anniversary of the dismissal of the Whitlam Labor government by the Queen’s representative in Australia.  Lindsay Tanner has the best advice on this subject: get over it.  Dramatic though it was, it is all too easy to exaggerate the significance of this event.  The counter-factual history is one in which the Whitlam government would have been repudiated at the next election anyway.  The removal of Whitlam in November 1975 did little to arrest the secular expansion in the size of government over the last 30 years.  The current government has built extensively on Whitlam’s legacy in its further centralisation of power in the hands of the Commonwealth.  The scope for fiscal and regulatory competition within Australia’s federal system of government has never been smaller.

November 1975 does leave an important legacy for Australian republicanism.  The 1999 republican referendum arguably failed because republicans did not adequately address the issue of the reserve powers of the head of state.  The republican movement in Australia has always been motivated by anti-establishment nationalism rather than a genuine republican constitutionalism, so it has never taken constitutional issues seriously.  Republicans will be hard pressed to offer an improvement on constitutional monarchy while it retains this narrow nationalist mindset.  As far as heads of state go, one who lives thousands of miles away and minds her own business is about as good as it gets.

posted on 10 November 2005 by skirchner in Politics

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How Many Unemployed Kiwis Would It Take to Fill Telstra Stadium?

New Zealand’s unemployment rate has fallen to its lowest on record at 3.4% and also the lowest among 27 OECD countries that report standardised unemployment rates.  Labour force participation is also at record levels.  The number of unemployed in New Zealand is now so low, they would leave more than 10,000 empty seats at Telstra Stadium for a Wallabies-All Blacks game.

By contrast, Australia’s unemployment rate in October was 5.2%.  While still close to 27 year lows, the differential with NZ highlights Australia’s failure to tackle labour market reform.  The Australian government’s proposed IR reforms are decidedly inferior to the NZ model.  While they may still assist in lowering Australia’s unemployment rate, the differential with NZ shows the extent to which unemployment in Australia is a deliberate policy choice, wilfully ignoring a superior reform model across the Tasman.

posted on 10 November 2005 by skirchner in Economics

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Seasonal Influences on US House Prices

Before getting too excited about the reported moderation in US house prices, it is worth considering what Action Economics chief economist Mike Englund has to say about seasonal influences on US house prices:

U.S. housing industry reports of moderating prices imply little about annual trends. Prices decline sharply in nearly every Q4 in this highly seasonal industry, and declines are particularly big in years with large Q2 and Q3 gains…

to those that believe they take these seasonal patterns into account by using y/y growth rates to effectively “cancel out” existing seasonal patterns, note the exacerbating trend in seasonal patterns through the thirty-six year existing home sales dataset for prices. Price data for Q4 and Q1 are becoming weaker with time relative to trend, while price data for Q2 and Q3 are becoming stronger with time, hence allowing the data to increasingly “beat the seasonals” with swings that impact y/y calculations with seasonal effects…

the declines thus far are small compared to the out-sized advances reported in the first three quarters of the year, and seem to be paralleling the powerful and widening seasonal swings that are typical for the industry. It is hardly clear that recent reported price drops are significant in the context of seasonal patterns. The jury will remain out for this sector until we enter the next big “price discovery” session for this sector—in Q2 of 2006.

posted on 09 November 2005 by skirchner in Economics

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The Doomsday Cult Capitulation Trade

‘Buffett’s Berkshire Yanks Billions In Forex Bets:’

Buffett’s Berkshire said on Friday that it had reduced its foreign currency holdings to $16.5 billion, from $21.5 billion three months earlier.

posted on 07 November 2005 by skirchner in Economics

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Schadenfreude, Sex and House Prices

David Smith has been doing for the UK what this blog has been doing in the Australian context, drawing attention to the perverse demand for predictions of housing-related economic ruin.  Predictions of this kind have been about as successful in the UK context as they have been in Australia.  As Smith notes, they have also become something of an industry in themselves:

Many parts of the media have been itching for the crash to happen. From a crowded field, my nomination for most ridiculous housing headline this year goes to the Daily Express. “House prices slump”, its banner front-page headline screamed on September 30. The story was that the Nationwide building society had reported a 0.2% drop in house prices for the month. Some slump.

A whole industry has built up around the crash story, with websites, weblogs (blogs) and newsletters. I can only think this is driven by schadenfreude - pleasure in the (potential) misfortune of others.

Rather than simple schadenfreude, there is probably a more complex story of cognitive bias at work here.  The main problem is the willingness of people to adhere to an asymmetric view of the future distribution of economic shocks, a bias which is then exploited by publicity-seeking forecasting firms and the media.  As Smith notes, predictions of stagnation are not nearly as sexy as forecasts of a crash. 

The perverse element in all this is when forecasters go looking for possible adverse shocks to rationalise their house price forecast.  Nouriel Roubini did the same thing at the Cato monetary policy conference in relation to the USD (see previous post), rattling off every conceivable thing that could go wrong for the USD to justify his essentially pre-determined view that it must fall.

posted on 06 November 2005 by skirchner in Economics

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Industrial Relations Reform

The real problem with the government’s IR reforms:

The Government’s laws, introduced into parliament this week, are much more complicated than the Fightback! industrial relations package that Mr Howard, then a Coalition frontbencher, launched in 1992 with former Liberal leader John Hewson.

New Zealand’s Employment Contracts Act runs to 100 pages, with the core legislation in just 20. By contrast, the Howard Government’s WorkChoices legislation is almost 700 pages long and is accompanied by an explanatory memorandum of 560 pages.

In 1990, New Zealand’s Bolger government took the radical approach of abolishing the country’s highly prescriptive award system and regulating tribunal.

In their place, it imposed a minimum wage and basic employment conditions.  All workers were employed under individual contracts, with conditions left to the market.

Despite disputed figures on productivity, New Zealand now boasts an unemployment rate of 3.5 per cent while Australia’s official rate hovers at about 5per cent - still the lowest here for more than two decades.

posted on 03 November 2005 by skirchner in Economics

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Institutional Economics Now Available via Newstex

Institutional Economics is no longer being aggregated at Nouriel Roubini’s $600 a year doomsday cult site (can’t think why!)  However, it is now available via Newstex, where you can choose your own content from among numerous financial and other blogs:

Newstex offers Content On Demand, including tailored, real-time news and commentary from thousands of branded newswires, newspapers, magazines, financial and business sources, official government feeds and weblogs. Newstex collects full-text digital news and commentary feeds, standardizes the content format, adds stock ticker symbols, people tickers and categories, and instantly delivers the result as easy-to-integrate XML or RSS newsfeeds.

posted on 02 November 2005 by skirchner in Economics

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