Matt Nolan

Sometimes TVHE does raise points

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Over at Money Illusion Scott Sumner states:

The recent Swiss devaluation has led to some interesting reactions in the blogosphere.  But one angle that I haven’t seen discussed is the relationship of the Swiss action and bubble theory.

Within an hour or two of the announcement we had said (in additional to the straight avoiding deflation argument):

Furthermore, it seems apparent that the Swiss National Bank views the current level of the currency as a bubble – people running to saftey see the Swiss Franc as attractive, and people who want to invest expect this to continue, leading to a self-fulfilling expectation driving up the value of the Franc.

Then when discussing the cap the next day we said:

I can understand why they did it, they felt there was an asset price bubble in their exchange rate – and they wanted to provide a lower focal point that traders could shift too (since expectations were driving the currency … note the increase in risk associated with intervention is also important).

TVHE is little, and doesn’t say much – but at least we picked up that angle immediately.  And so we’re going to claim it … do we get a high five

Matt Nolan

Will the Swiss event start a series of competitive devaluations?

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In so far as we believe monetary policy in most countries is “too tight” there could be a significant upside to the Swiss decision to set a minimum value on their Euro change rate – if currency intervention is copied by most other countries it will lead to a loosening in monetary conditions.

Scott Sumner hints at this, and its an issue we’ve discussed here before.  Although it is true that “not all countries can depreciate their currencies at once” they can devalue their currency relative to goods – they can create inflation.  If there are risks of deflation, or inflation expectations are below the central banks target, such intervention could be justified.

Now, when writing about the Swiss event I wasn’t quite as confident.  This was due to the fact that the Swiss actually went out and set a value on the currency – rather than just loosening policy.

I can understand why they did it, they felt there was an asset price bubble in their exchange rate – and they wanted to provide a lower focal point that traders could shift too (since expectations were driving the currency … note the increase in risk associated with intervention is also important).  But if everyone sets “targets” there is the risk that we get an exchange rate regime where this rate doesn’t respond to changing economic fundamentals – and given that economic fundamentals change constantly, this is a concern.

Matt Nolan

If Europe’s bank don’t trust themselves, why would anyone else?

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Quite. (ht Marginal Revolution)

The issues in Europe remain the most concerning thing for me at the moment – the US has a large drought and a weak patch, but at least we don’t have to ask if their central bank has the ability to always act as a lender of last resort.

The fact that there is no central fiscal authority in Europe, and the fact that people are unsure whether they can trust the ECB in a worst case scenario, makes matters difficult over there.

My concern for NZ comes from the same place they always do during these financial crises: will it lift the cost of funding (which is happening in part – albeit at a time when additional credit remains cheap) and lower export commodity prices (which hasn’t happened).  With a stagnant Europe NZ can do fine, but if they lose the plot we will not be left unharmed.

Update:  For future reference (as I often use these types of posts when I’m going back to look at history – it is amazing how useful blogging has been in this context), growing issues regarding German’s willingness to bail out the region (following election defeats for the incumbent) are a major driver of increasing uncertainty at this point in time.  Also note that the decision to start suing US banks now, in the middle of a crisis, isn’t particularly helpful.

Matt Nolan

A quick question … and an answer

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From point 3 on this piece on Rates Blog we have the following statement:

It’s good to see the issue of free trade being debated. Frankly, it hasn’t worked for the middle classes of the developed world. They got cheap stuff, but lost their jobs.

How exactly does this make sense when during the “peak” interventions by China (in terms of their devalued currency) our unemployment rate was at record low levels …

I’ll answer, its because the idea of “taking jobs” doesn’t really make sense – they subsidised their exports, and lent the money to buy them at a low rate of interest (driving down real interest rates, and driving up borrowing).  This imbalance creates losers – the solution isn’t to copy it.

“Jobs” aren’t being created now because of uncertainty – that is the key.  We need to talk about ways that we can deal with uncertainty at the moment (if at all) – not start arbitrarily restricting trade.

Protectionism is not the way to go.  There are two types of people who want protectionism:  People like Bernard who want us to do something they believe will improve outcomes, and people like car manufacturers in Aussie who are just self-interested.  I promise you that if we go down the protectionist root route (turns out I’m illiterate, especially when writing these things at 1am), the only people that will be happy will be these car manufacturers – not society, and not many of the people asking for such measures now.

 

 

Matt Nolan

A point on “wealth”

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People keep telling me that the top 1% own some large chunk of the wealth – and that this is obviously unfair.  And hey, it might be.  But I think the conception of wealth that is being used here isn’t really appropriate.

The wealth that is being looked at is the asset value of these people – so this tells us the expected discounted sum of profits from this physical capital.  Fair enough.

However, what we are missing is human capital – we can’t really compare “wealth” levels unless we look at all forms of capital.  As a result, we need to add in the expected discounted sum of labour income into peoples measured “wealth” before we can start to make any sort of comparison.  I suspect that this may change the story somewhat …

The thing here is that, we may feel that a lot of physical capital is “owned” by too few people – but the requirement of labour in this case implies that the surplus created by the physical capital will be shared between workers and capital owners through profits and labour income.  We can’t just look at one side of this and bemoan it – we would need to show that there is some type of issue in the wage bargain between workers and capital owners AND we would need to use a measure including human capital to get an idea of the true distibution of capital.  Once we have done that we can start throwing around our value judgments – but the current case is merely being cherry picked to fill a narrative that wealth is too concentrated (which is may be), without fully putting together the case.

Matt Nolan

A point on debt

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Around the world there are a lot of complaints that there is too much debt, that debt will prevent a recovery, and that debt is the root of all problems – be it fiscal deficits, debt fueled consumption, or a debt powered housing market.

While there are undeniable issues to keep in mind, there are a few things to remember with these large debt levels – and one of the most important is that there are some people on the otherside of this debt.

Unknown to some is the fact that, as a planet, we are not actually in a net debt position with the rest of the galaxy (although the statistics say otherwise, I think there is an error – rather than us owing money to Martians).  As a result, for every person who has a liability owing there is another person or group who views that as an asset.  When we look at what the “issues” are with debt, we have to keep this point in mind.

Now this sounds like me stating the bleedingly obvious AGAIN … but lets think about some of the conclusions that come out of this:

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