By Ajay Shah, on July 16th, 2010
The top selling Indian newspapers according to Amazon’s kindle subscriptions.
India’s courts may be in a slow process of reshaping India into a liberal democracy. Here is a Supreme Court ruling which blocks the Maharasthra government from interfering with the rights of a citizen to read a certain book. Sadly, it was done on a technicality.
Manish Sabharwal in the Financial Express on an important new initiative of the Ministry of Labour.Eric Bellman in the Wall Street Journal on the rise of Madras in automobile manufacturing. There is much strength there in electronics manufacturing also.
Dhiraj Nayyar in the Indian Express on the interfaces between mobile telephony and banking. [also see].
Kerala is Number 1 by Mahesh Vyas in the Business Standard.
On the difficulties of ULIPs and the recent ordinance, see Dhirendra Kumar in the Financial Express.
A story by Steve Lohr and John Markoff in the New York Times suggests that low end outsourcing to India could be under attack from new technology.
B. S. Raghavan in the Hindu Business Line on inflation targeting at RBI.
Hindustan Times and Mint have built an interesting new web page : The Indian innovation revolution.
We in India are very convinced that it is good to have a world where every single individual is numbered and trackable. But there are many nice things about anonymity and the creation of anonymous personas. See this story of Why, a person who did some amazing things anonymously, and then shut down this life when it looked like his anonymity was under threat. The idea of being able to create and live multiple anonymous invented personas has long been a meme in the hackish community – e.g. see True names by Vernor Vinge.
An interesting interview by Samir Sachdeva with Nandan Nilekani in Governance NOW magazine.
As I read Lose a general, win a war by Thomas E. Ricks in the New York Times, I was struck by this remarkable flexibility of labour contracts, which must work wonders for shaping incentives correctly.
Tarun Ramadorai on empirical analysis of the efforts at banning short selling of recent years.
David Friedman has released a free pdf of the 2nd edition of his important book The machinery of freedom. Hmm, that’s a good strategy: authors should open source edition $n$ when they start on edition $n+1$. Also see: a surge in interest in Friedrich von Hayek’s The road to serfdom.
Ruuel Marc Gerecht has some interesting ideas in the New York Times on the use of information technology to assist the resistance in Iran. I wonder if similar ideas can be deployed on the problems of China as well.
Tom Wright has an article in the Wall Street Journal about Zeeshan-ul-hassan Usmani, a Pakistani scientist working on explosions and suicide bombings. Also see Pervez Hoodbhoy on Pakistan’s existential problems.
Calzolari, Levi, Navaretti, Pozzolo, writing on voxEU, show that multinational banks were a source of stability in the crisis. Also see Internal capital markets and lending by multinational bank subsidiaries by de Haas and van Lelyveld, in the Journal of Financial Intermediation.
Ila Patnaik on the Chinese exchange rate regime and its implications for India.
Inflation targeting turns 20 by Scott Roger, in Finance & Development, March 2010.
Edward Glaeser reviews a book by Joel Mokyr on what made the industrial revolution. It makes you think about the nascent capitalism that we see in India.
The top
selling Indian newspapers according to Amazon’s kindle subscriptions.
India’s courts may be in a slow process of reshaping India into a
liberal democracy. Here is
a Supreme
Court ruling which blocks the Maharasthra government from
interfering with the rights of a citizen to read a certain
book. Sadly, it was done on a technicality.
Manish
Sabharwal in the Financial Express on an important new
initiative of the Ministry of Labour.
Eric
Bellman in the Wall Street Journal on the rise of
Madras in automobile manufacturing. There is much strength there in
electronics manufacturing also.
Dhiraj
Nayyar in the Indian Express on the interfaces between
mobile telephony and
banking. [also
see].
Kerala
is Number 1 by Mahesh Vyas in the Business Standard.
On
the difficulties
of ULIPs and the recent ordinance,
see Dhirendra
Kumar in the Financial Express.
A
story by Steve Lohr and John Markoff in the New York
Times suggests that low end outsourcing to India could be
under attack from new technology.
B. S. Raghavan
in the Hindu Business Line on inflation targeting at RBI.
Hindustan Times and Mint have built an interesting
new web page
: The
Indian innovation revolution.
We in India are very convinced that it is good to have a world
where every single individual is numbered and trackeable. But there
are many nice things about anonymity and the creation of anonymous
personas. See this
story of _Why, a person who did some amazing things anonymously,
and then shut down this life when it looked like his anonymity was
under threat. The idea of being able to create and live multiple
anonymous invented personas has long been a meme in the hackish
community – e.g. see
True
names by Vernor Vinge.
An
interesting interview
by Samir Sachdeva with Nandan Nilekani in Governance NOW
magazine.
As I
read Lose
a general, win a war by Thomas E. Ricks in the New York
Times, I was struck by this remarkable flexibility of labour
contracts, which must work wonders for shaping incentives
correctly.
Tarun
Ramadorai on empirical analyses of the efforts at banning
short selling of recent years.
David Friedman
has released
a free pdf of the 2nd edition of his important
book The
machinery of freedom. Hmm, that’s a good strategy: authors
should open source edition $n$ when they start on edition
$n+1$. Also
see: a
surge in interest in Friedrich von Hayek’s The road to serfdom.
Ruuel
Marc Gerecht has some interesting ideas in the New York
Times on the use of information technology to assist the
resistance in Iran. I wonder if similar ideas can be deployed on the
problems of China as well.
Tom
Wright has an article in the Wall Street Journal about
Zeeshan-ul-hassan Usmani, a Pakistani scientist working on
explosions and suicide bombings. Also
see Pervez
Hoodbhoy on Pakistan’s existential problems.
Calzolari,
Levi, Navaretti, Pozzolo, writing on voxEU, show that
multinational banks were a source of stability in the crisis. Also
see Internal
capital markets and lending by multinational bank
subsidiaries by de Haas and van Lelyveld, in the Journal
of Financial Intermediation.
Ila
Patnaik on the Chinese exchange rate regime and its
implications for India.
Inflation
targeting turns 20 by Scott Roger, in Finance &
Development, March 2010.
Edward
Glaeser reviews a book by Joel Mokyr on what made the
industrial revolution. It makes you think about the nascent
capitalism that we see in India.
Anyone interested in the world of the Internet and computer
technology must read:
The State of the Internet Operating
System by Time
O’Reilly: part
1
and part
2.
John Naughton in the Guardian.
Clive
Thompson in the New York Times on IBM’s computer that
plays `Jeopardy’.
What’s
the greatest software ever written? by Charles Babcock,
in Information Week
The
Steve Lohr and John Markoff story about speech recognition, and
system-building around it, mentioned above.
By Claus Vistesen, on June 22nd, 2010
Someone tried to make the point that the making the Yuan more flexible was already “priced in”; well it might be of course, but so far markets are bathing in serious risk on mode. Copper futures up some 4.5%, AUD/USD at 0.88ish and I could go on and on …
Enjoy it while it lasts …
(quote Bloomberg)
Asia shares rose the most in almost seven months, U.S. and European stock index futures climbed and commodities advanced after China signaled it will relax the yuan’s fixed rate to the dollar. Treasuries fell.
The MSCI Asia Pacific Index rallied 2.8 percent to a six- week high of 119.42 at 3:15 p.m. in Tokyo. Futures for the Standard & Poor’s 500 Stock Index climbed 1.7 percent and those for the Euro Stoxx 50 added 1.6 percent. Oil increased 2 percent to $78.77 a barrel and copper jumped 4.3 percent. The yuan appreciated the most in 20 months versus the dollar. U.S. Treasury 10-year notes fell for a second day. The People’s Bank of China said it will end a two-year currency peg adopted during the global financial crisis to protect exporters, in a sign policy makers see the world economy strengthening. Commodity and industrial companies lead gains in Asian stocks on optimism for increased sales in the world’s third-largest economy.
“It’s a vote of confidence in Asia and in risk appetite and a reduction in the dangers of a trade war,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “The currencies of Asian nations, which are close competitors with China on the trade front, should do well.” The MSCI Asia index climbed the most since Nov. 30. The Nikkei 225 Stock Average jumped 2.4 percent and the Hang Seng Index rallied 2.8 percent to lead all regional benchmarks. Australia’s S&P ASX/200 Index advanced 1.4 percent and South Korea’s Kospi Index gained 1.5 percent.
By Ajay Shah, on June 16th, 2010
The rupee/dollar rate has gained in flexibility. In order to visualise what has changed, it’s useful to look at a graph of the time-series of weekly percentage changes, expressed in absolute terms. That is, a change of -3% or +3% is shown as a bar of height 3 in this graph:
The vertical blue lines show the dates of structure change in the exchange rate regime. These are taken from our recent paper The Exchange Rate Regime in Asia: From Crisis to Crisis, which is forthcoming in International Review of Economics and Finance, and is part of our work on measurement of the de facto exchange rate regime. As an aside, a recent article in The Economist about Asian currency flexibility talks about this in a larger context.
The vertical blue lines break the overall experience into six distinct periods: a first period of high flexibility, then the shift to a nearly fixed rate in April 1994, then the higher flexibility at the time of the Asian crisis followed by a return to very low flexibility, and then two moves of increasing flexibility.
These movements towards flexibility — and away from administered prices — require corresponding adjustments on the part of the economy. If firms are coddled with an administered price and thus think that currency risk does not exist, or if exporters are coddled with a distorted exchange rate, then this generates the wrong behaviour on their part. See Ila Patnaik in the Indian Express on learning to live with a genuinely market determined exchange rate. Also see T. B. Kapali, of the Shriram Group of Companies, in the Hindu Business Line arguing in favour of greater flexibility for corporations in hedging currency risk.
By Rok Spruk, on April 29th, 2010
Here’s a brief reading list on the issue of China’s exchange rate and US manufacturing jobs:
Simon J. Evenett and Joseph Francois on whether Chinese currency revaluation will create net jobs for the US economy (link).
William R. Cline’s discussion of estimating the effect of renmimbi appreciation on American jobs (link).
Abdul Abiad, Daniel Leigh and Marco E. Terrones’s analysis of cost of reducing large current account surplus (link).
Paul Krugman’s discussion of Chinese exchange rate policy (link) (link).
By Rok Spruk, on March 17th, 2010
Paul Krugman (link) and Greg Mankiw (link) analyze the costs and benefits of China’s exchange rate policy.
By Ajay Shah, on January 5th, 2010
Many people believe that the exchange rate regime (i.e. the monetary policy regime) of each country is its own sovereign choice.
In the Great Depression, we saw the harmful effects of the exchange rate mercantalism that is feasible with fiat money. This was a key motivation for Keynes and others in their design of the post-war order. The IMF was supposed to be a multilateral body that would help bring pressure on countries to move towards good sense through `ruthless truth-telling’. This didn’t work out too well. The IMF got itself into a box where it would not say anything about exchange rate regimes. To some extent, by standing ready to help countries that got into a currency crisis, it has helped perpetuate exchange rate pegging.
For the present discussion, I want to emphasise the distinction between small countries who can pretty much do as they like as opposed to systemically important countries where actions have a significant impact upon the world economy at large. In this approach, the four interesting questions are:
- In the selfish maximisation of one country at a time, what is the optimal choice of monetary policy regime / exchange rate regime?
- What the mechanisms and empirical magnitudes through which the exchange rate regime choice of one country imposes externalities on others? I.e. what is the consequence of the Nash equilibrium?
- What is an ideal solution for the world, which combines optimality for the local economy with good system outcomes?
- What international institutional arrangements can help push the system towards the right solution?
On the first question, some people believe that exchange rate mercantalism is good for the country. You don’t find much of this amongst professional economists.. As Merton Miller said: If devaluations could make a country rich, Argentina would be the richest country in the world. For a careful rebuttal of this loose thinking, done by one of the world’s top economists, see these discussant comments by Michael Woodford about a paper with this view by Dani Rodrik. As Andrew Rose said in a discussant comments at the Neemrana conference about a similar paper by Surjit Bhalla: This is either a home run or it’s totally wrong.
I feel that exporting is great for growth, but only when this exporting involves genuinely facing the market test of the global market. If a country exports based on subsidies of some sort – which I term `fake exports’ - then the gains in productivity and capability do not come about (link, link). My sense is that in China also, intellectuals no longer buy the `distort everything for exports’ idea.
As with every other export-subsidy or protectionist scheme, this has more takers amongst non-economists than amongst economists. It’s slow hard work, banging these down over and over.
On the second question, see Paul Krugman: link, link.
On the third question, I have a comment on `global imbalances’. Some people see big numbers for current account surpluses/deficits as being intrinsically flawed. I look upon them as being the success of globalisation, as a repudiation of the Feldstein/Horioka problem. It is in an autarkic world that you see Feldstein/Horioka problems, where capital flows are not large. If we are to get beyond the Lucas paradox, and get back to the massive `development’ capital flows of the First Globalisation, it’s going to require large sustained BOP surpluses in some countries and deficits in others.
As an example, the best deal for ageing OECD is to buy securities in young countries like India today, thus spurring their growth today. Over the next 50 years, these securities would yield a flow of widgets back and thus support consumption of their elderly.
Hence, I would say the question is: How can the world be made safe for large BOP surpluses/deficits? This is a more interesting and important problem, instead of saying to ourselves: How can the world eliminate large BOP surpluses/deficits.
By Claus Vistesen, on November 5th, 2009
It is indeed an old adage that while goods things are to be preferred over bad things it is possible to get too much of the former. Looking at recent comments from the governor of the Reserve Bank of Australia it is not difficult to imagine how these, albeit old and worn, pearls of wisdom may well have inspired Mr. Stevens in his effort to tiptoe the tightrope between signalling the intention to raise rates into an expected economic recovery on the one side and trying to prevent the Aussie shoot of on helium into the sun with wings of wax on the other.
(quote Bloomberg)
Australia’s central bank Governor Glenn Stevens signaled a surge in the nation’s currency to near parity with the U.S. dollar has given him scope to slow the pace of future interest-rate increases.
Stevens, who yesterday became the first central banker in the world to raise borrowing costs twice in 2009, said the 28 percent gain in the currency this year may hurt exports and cool inflation, allowing him to “gradually” raise borrowing costs. Just last month, he warned it may be “imprudent” to keep rates at “emergency levels.” The local currency and bond yields fell as traders slashed bets on another quarter-point boost next month, after Stevens raised the overnight cash rate target to 3.5 percent from 3.25 percent. Investors have been driving the Australian dollar toward parity with the greenback, betting China’s economic growth will boost exports from Australia, the biggest shipper of iron ore used in making steel.
Policy makers “are probably glad for the parity talk as it reduces the amount of work they need to do with monetary policy,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “A December move is a 50-50 proposition.” Traders are betting there is a 50 percent chance Stevens will increase the key rate by another quarter point on Dec. 1, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:22 p.m. today. Prior to Stevens’s comments, they had a 96 percent bet on such a gain.
Mr. Stevens’ comments follows in the heels of the recent push by part of the Aussie towards parity with the US dollar reflected primarily in the fact that the RBA has already raised twice in 2009 (from 3.00 to 3.5%) as well as a growing risk sentiment which is a fundamental prerequistie, in the current market, for observing investors react to (growing) yield differences. In so many words, this is all about carry trade and more specifically about the fact that in a world where the G3 and others are still fiddling with quasi- or outright QE it takes a brave sould to initiate a hiking process since it will mean an immediate reaction in the currency market. This is especially the case when the liquidity anchor effectively constitutes the US and thus; while the US pump priming keeps a floor under risky assets and volatility at low levels it becomes a veritable turkey shoot to gun for those currencies whose central banks are on the hike (see more here).
Following Mr. Stevens’ comments, the Aussie did lose a bit of its steam even if many currency punters still see it racing towards parity over the course of the coming year.
 For example David Forrester who is currency economist at Barclays Capital expects the Aussie to test the parity level in 2010, a call based on the idea that the RBA will have hiked rates to a full 5.5% by the end of next year. Needless to say, in a world where risky assets continue to fly and risk aversion is kept in check this will provide a juicy interest rate differential vis-a-vis the G3 and thus the carry trade flows (be they actual carry trades or simply spot market piggy backing) will be plentiful.
The question is of course; can you blame the RBA for wanting to raise rates?
As it turns out, not really and particularly not in light of global central banks’ new found focus on asset prices in setting the policy rate. You know, it was all Greenspan’s fault and all that jazz. Still, for those worried about a too rapid V-shaped recovery, Australian house prices seem to offer plenty of things to worry about.
From Q3-08 to Q1-09 the house price index (weighted for the 8 biggest cities) fell a modest 5.6%, a drop which has been decisively paired in Q2/Q3-09 with the index rising a cumulative 8%. This picture is repeated if we look at a general gauge for consumer spending in the form of a sector break down of retail sales.
Consequently, the annual as well as monthly flow of retail trade turnover never really went decisively into negative in the context of the financial crisis which has no doubt contributed to the fact that the RBA never really contemplated a move into ZIRP and QE.
What happens next then?
Well as I noted recently, the burden of rebalancing may be tough to carry for those economies who have central banks brave enough to raise interest rates. Ironically of course and if it is really asset prices you are worried about, the risk is naturally that you just end up sucking in liquidity as you which in itself defeats the purpose of the hiking campaign (see Edward’s recent piece on Norway for a Scandinavian perspective on this). Naturally, you can retort to Brazil like capital controls, but in a world where capital flows freely and where the global economies are largely interdependent, this is like trying to stop a freight train with a VW Polo. Also, allow me to finish with a small quibble of mine in relation to the sudden urge by part of central bankers to target asset prices. I mean, this is fine and all and for those who know a little bit about monetary policy this is not something completely new. The problem is merely that targeting asset prices may not only be counterproductive in a world where asymmetric liquidity conditions and carry flows are the norm, by targeting asset prices also entail targeting a price which is considerable more volatile than traditional prices (because I assume that forecasting long term asset prices is not as easy as many believe). In this way, a steady gaze at asset prices may also conflict with central banks’ general propensity to favor incremental and gradual moves.
Whether this is the case in Australia, only time will tell. Yet, from the lovely fjords of Oslo, to the beaches of Rio, and on to the Great Barrier Reef policy makers may soon learn that you can indeed get too much of a good thing.
By Cheryl Grey, on August 12th, 2008
The Australian dollar reaching for parity with the U.S. dollar, marked by the horizontal green line near the top of the black screen. So close.  As the U.S. economy slowed during the fourth quarter of 2007 and the first quarter of 2008, everybody knew that Canada would, sooner or later, be dragged down along with it. The two economies are intimately entwined—around 80% of Canadian exports, both commodities and manufactured products, head due south, and their northern neighbor is a bigger market for U.S. goods than all 27 members of the Eurozone combined. With these two nations particularly sensitive to each other’s economic sneezes, when the Federal Reserve began chopping interest rates with an ax, the Bank of Canada stood right behind them and hewed their own rates by 33% between December 2007 and April 2008.
During that same period of time, however, the Reserve Bank of Australia was raising interest rates to battle surging inflation and contain the effects of a huge influx of capital from soaring commodities prices and a 20% increase in their terms of trade. Flooding in Queensland coke mines and steady demand in Japan, India, South Korea and Taiwan caused the price of coal, Australia’s top export, to triple this year as fresh Chinese demand made it a seller’s market. Negotiated prices of iron ore, their second most important export, nearly doubled, again with Chinese impetus, and there’s really no reason to mention what happened to the prices for Australia’s other commodity goods, such as gold, crude oil, beef and copper.
Asia and Australia
Although there were clear signs the economic slowdown in the U.S. and Canada was spreading to the UK, it seemed that it would make no mark on the Australian and Asian boom, which had seemingly “decoupled” from the Western hemisphere’s problems. The demand surge for commodities in Asia, led by the insatiable maw of that newest kid on the block—you know, the one hosting the Olympic games—turned Australia’s trade deficit into a surplus in June 2008 and looked set to keep it that way for a long time.
After all, the reasoning went, 68.7% of Australia’s exports went to nations in the Asia-Pacific Economic Cooperation and another 12.8% went to China. Only 7.3% of all Australia’s exports went to the U.S., and that share was falling anyways. So if it declined further, well, there would be another hungry nation ready to take up the slack.
This decoupling theory for Australia and Asia gained popularity among traders who liked the down-under markets. In the second quarter of 2008, while credit market losses sent depository and investment banks reeling in the U.S. and UK, the Australian dollar embarked on an unbroken nine-week climb against the greenback. It looked amazingly similar to the Canadian dollar’s 17% surge against the U.S. dollar in 2007 that took it to parity and beyond, and foreign exchange traders confidently predicted the same would happen for the Aussie.
But something funny happened on the way to parity.
That creeping economic malaise from the U.S., Canada and the UK spread to their immediate trading partners, including the Eurozone and Japan, and from there it spread further as that other economic theory—globalization—reasserted itself. It took months because the U.S. slowdown began in the housing market, generally a domestic-only sector (not counting imported building materials), but the erosion of discretionary funds ate away at U.S. imports while the weak greenback made U.S. exports more affordable overseas, shifting the balance of trade in ever-spreading ripples across the globe. Partly due to these ripples, gross domestic product for Japan and the Eurozone are both expected to be in red ink for the second quarter of 2008, a point passed by the U.S. in the fourth quarter of 2007.
With global demand starting to fall, commodity prices slid to follow, and with such a large percentage of the Australian economy dependent upon commodity exports, it followed suit. On July 15, the exchange rate between the Australian dollar and the greenback touched 0.9848, a penny and a half beneath parity. Then on August 5, the Reserve Bank of Australia reached for the ax and announced that soon it would need to cut interest rates, too, like almost every other central bank around the world. The Aussie fell off the table, decoupled no more.
In the modern small market world, one might say, no economy is an island—not even Australia.
By B.P.T., on July 19th, 2008
Europe has long been a favored travel destination for American travelers. In spite of the dollar’s downward spiral, Americans continue to flock to Italy, the UK, Germany and a few other favorites. As the dollar passes the $1.56 mark against the euro (remember the days when they were essentially equal?), travel has been only slightly hindered for Americans.
In fact, in 2007, according to the U.S. Department of Commerce’s Office of Travel and Tourism Industries (OTTI), the number of Americans traveling abroad grew by 1% from 2006 to 2007, increasing for the fourth year in a row. However, the first quarter of 2008 could hint of change as the economy continues to weaken and the euro strengthens. Combined with higher fuel prices, and hence higher airline prices, travel to the Continent is starting to get quite expensive.
OTTI reports a .2% decline for American travelers to Europe in the first quarter of 2008, as compared to the same period last year. Interestingly, however, in a few areas where the dollar remains relatively strong, such as South Africa, Mexico and South America, travel has increased. Americans traveling to Central and South America have increased in numbers by over 6% from last year, Mexico is up more than 8% and visitors to Africa are up a whopping 47.9% over 2007.
Against All Odds
And while many Americans who choose to vacation abroad are still traveling, that trend is likely to drop off especially if the economy continues to limp along. The Air Transport Association has reported that jet fuel prices have increased a head-spinning 70% through July 3 in comparison to 2007.
The New York Times reports that airlines industry analysts expect cuts in flights by nearly 10% for the year. And what about those economic stimulus checks? The Y Partnership, a travel industry PR firm, in cooperation with the Travel Industry Association, found in a recent survey that one in six of those receiving a check would spend it on travel.
So where are Americans choosing to vacation? For luxury travelers, high-end hotels, African safaris and River cruises in Europe are still popular. But for the average traveler who cannot afford the currently expensive euro, destinations such as Central and South America are looking very good. Many, however, are also choosing to stay in the States. Travel + Leisure magazine’s latest issue may be the harbinger of travel trends to come. Typically aimed at an upscale market of travelers, the July 2008 issue is draped in red, white and blue, and the headline reads “50 Fabulous U.S. Travel Ideas.” The editor’s regular column acknowledges the precipitous drop of the dollar against the euro and offers ideas for meaningful travel within the 50 states.
Travel Bargains
Arthur Frommer, long known for his budget travel guides and magazine Arthur Frommer’s Budget Travel, presented with his daughter Pauline at the April 2008 Atlanta Travel Expo. Their topic was travel bargains. Among the top picks were China, Vietnam, Kenya and Panama in addition to the American system of National Parks.
Exploring less frequented areas can offer a more authentic view of culture as well as a more favorable cost. Panama, which had an iffy reputation for travelers back in the 1980’s Noriega years, has transformed itself into a country ripe for visitors, with both rainforest jungles and sparkling beaches. (Disclaimer: travelers to foreign countries should always check with the State Department before departing.) The Panama Canal, which was handed over to the Panamanians by the U.S. in 1999, has experienced its busiest year ever in 2007. Furthermore, even though Panama uses the Balboa as currency, U.S. dollars are widely accepted, dispensing with the whole issue of currency exchange. With a beer that can easily cost under $1 and a wide range of tropical activities, Panama is becoming a popular destination.
Africa is becoming popular as an alternative to Europe too. For visitors who stay in a standard tourist hotel, rooms can be had in South Africa for under $50 per night, according to solotravel.org which offers cost guides for a number of countries. This is in sharp contrast to France, where a mid-range hotel will easily run you over $100 per night. Travelers who enjoy going abroad can also find great deals in other areas around the globe – such as a tourist hotel in China for about $30 or less and $20 in Vietnam.
By Cheryl Grey, on July 10th, 2008
Much of the world faces slower economic growth this year, initiated by the U.S. subprime mortgage crisis which has sliced assets and balance sheets of commercial banks throughout the world to the tune of at least $387 billion. The International Monetary Fund, which monitors economic conditions throughout the world, predicted in their latest outlook (April 2008) that world economic growth would slow to 3.7% this year from 4.9% in 2007. Although their forecast isn’t proving crystal ball accuracy (first quarter 2008 growth in the U.S. came in at 0.9% as opposed to the IMF assessment of 0.5% for the entire year), such a drop in global economic expectations is sobering at best.
Central banks would normally fight such risks to their nation’s gross domestic product by lowering interest rates to encourage demand, as the Federal Reserve, the Bank of Canada and the Bank of England have all demonstrated recently. The Fed has lowered the U.S. interbank lending rate by 3.25% since September, ferociously fighting the specter of recession, followed by the BoC (1.5%) and the BoE (0.5%) beginning in December as the slowdown snuck across their borders.
Because foreign currency exchange terms are heavily influenced by interest rates, when a nation’s official rate is lowered, the value of the currency declines as well. The weakening U.S. dollar (USD in forex cant), which has been sliding in value since April 2002, raised the cost of imports, including crude oil, and therefore discouraged hauling goods into the country. At the same time, the record low exchange rate reduced the cost of U.S. exports, which was good for the U.S. economy but not for its trading partners who increasingly find their own domestic production competing with goods made in the U.S.A. in an international role reversal.
Weakening Dollar and Soaring Prices
This global slowdown is being fueled by soaring inflation biting into consumer and corporate spending, lowering the level of discretionary funds in countries ranging from China to Germany. In Germany, producers’ prices rose 8.1% from May 2007 to May 2008, while in China, retail prices shot up 7.7% in one month. Pork alone rose 48%.
Most of these higher prices can be traced back to higher commodities prices with crude and fuel oils being the major culprits because they affect production costs. The reasons for crude oil doubling in price within the last twelve months is an article in itself, but the boost given by USD weakness against other major currencies—and remember, most commodities are priced in U.S. dollars—is estimated at around $25 per barrel.
So let’s put this in perspective. Global inflation is high because commodities prices are high. High commodities prices are caused in part by USD weakness. Ergo, strengthen the USD and watch commodities prices fall and inflation recede worldwide.
If only it were that simple.
The value of any nation’s currency, relative to those of other nations, is based on many factors—economic growth and prospects, interest rates, balance of trade, governmental accounting ledgers and so on—all of which take time to make their influence felt. Although U.S. exports contributed 0.34% to first quarter economic growth in 2008, nobody knew that until May 29 when the U.S. Department of Commerce released the data, and the resulting shift between the USD and the euro, for example, although monumental in forex terms, only strengthened the dollar by two cents.
Speaking to the Economy
So the USD isn’t going to become Popeye overnight, and the original global dilemma remains. Central bankers can’t raise interest rates to fight inflation because they’ll cut into GDP growth which is already balanced on a razor’s edge between creeping progress and outright recession. They can’t lower interest rates to encourage growth because inflation will balloon out of control. What, then, can they do?
They can talk.
Around the globe, politicians and central bankers are rattling verbal sabers. Most practiced at this art is the European Central Bank’s president, Jean-Claude Trichet, who has a series of “code phrases” that are inserted in his speeches when he and his multinational banking cadre are considering changing rates. Let the financial district hear him mention “heightened alertness” regarding inflation, a phrase signaling an interest rate hike, and the euro zooms up like a rocket.
So when France’s Finance Minister, Christine Lagarde, commented that the USD’s gains against the euro were “very satisfying” and when Russia’s Finance Minister spoke of the need for a stronger dollar, they’re fighting against currency exchange rates for their citizens’ purchasing power.
Let’s hope the global economy pays attention.
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