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  • Economics Lessons from Babysitting and Prison Camps

    Tim Harford says that we have a problem explaining how the economy works. It is too big. So we try to explain sections of it. But then the frame is too small and we misunderstand the way it all works. So Harford looks for smaller economies that behave enough like the economy at large that we can use them to make sense of recessions, inflation, and the like. In this Big Think interview, he discusses two such examples: a babysitting cooperative, and a prison camp:
  • Singapore Now The World's Priciest City

    You think New York City is expensive? San Francisco? Then don't move to Singapore. The Economist Intelligence Unit now ranks Singapore as the most expensive city to live. With the yen losing value over the last year, Tokyo lost its hold at the top if the EIU list. EIU economist Edward Bell talked about the rankings, and the key factors that make a city pricey or affordable, with the Wall Street Journal 's Deborah Kan :
  • Bloomberg: 'The European Debt Crisis Visualized'

    The European debt crisis is old news. And while the heat may have come down in the last year, it is not over. The interactive team at Bloomberg News has put together a new way of telling the story of the debt crisis. Some students may find the debt crisis easier to understand through this visualization. And we appreciate that this telling of the story goes back almost a century, so there students get the deeper context of Europe's current challenges.
  • Stephen Roach: U.S. Government Shutdown as China's 'Wake-up Call'

    At Project Syndicate , Stephen Roach writes about the debt-fueled China and U.S. co-dependence. While "China buys Treasuries because they suit its currency policy and the export-led growth that it has relied on over the past 33 year," the U.S. "runs chronic current-account deficits and relies on foreign investors to fill [its] funding void." It is a relationship that Roach sees as unsustainable. And The fights in Washington over the debt ceiling may serve as a "wake-up call." For more than 20 years, this mutually beneficial codependency has served both countries well in compensating for their inherent saving imbalances while satisfying their respective growth agendas. But here the past should not be viewed as prologue. A seismic shift is at hand, and America’s recent fiscal follies may well be the tipping point. China has made a conscious strategic decision to alter its growth strategy. Its 12th Five-Year Plan, enacted in March 2011, lays out a broad framework for a more balanced growth model that relies increasingly on domestic private consumption. These plans are about to be put into action. An important meeting in November – the Third Plenum of the Central Committee of the 18th Chinese Communist Party Congress – will provide a major test of the new leadership team’s commitment to a detailed agenda of reforms and policies that will be required to achieve this shift. The debt-ceiling debacle has sent a clear message to China – and comes in conjunction with other warning signs. Post-crisis sluggishness in US aggregate demand – especially consumer demand – is likely to persist, denying Chinese exporters the support they need from their largest foreign market. US-led China bashing – a bipartisan blame game that reached new heights in the 2012 political cycle – remains a real threat. And now the safety and security of US debt are at risk. Economic alarms rarely ring so loudly. The time has come for China to respond with equal clarity. Rebalancing is China’s only option. Several internal factors – excess resource consumption, environmental degradation, and mounting income inequalities – are calling the old model into question, while a broad constellation of US-centric external forces also attests to the urgent need for realignment. Read China’s Wake-Up Call from Washington here .
  • Foreign Investment Starts to Flow Out of Emerging Markets

    At Quartz , Matt Phillips shares the following grim image. It is of emerging market mutual funds: Phillips: As the rip-tide of liquidity pours out of a country, it drives the value of the currency lower. That makes imports of crucial foreign products—such as energy—costlier. The surge in spending on imports worsens the current account deficit. That prompts still more worries about investing, setting off a further outflow of investor cash. The decline of the currency gets deeper. A spiral can ensue until you hit something known as a “sudden stop,” which pushes a country into default. Such tidal waves of foreign investment into and out of emerging markets are a well-known problem, leading to a range of banking collapses, inflationary spirals, sovereign defaults and currency crashes. (Some have referred to them as “capital-flow bonanzas.”) They were at the heart of a slew of crises in the 1990s: Argentina, Thailand, Korea, Mexico, Turkey, Chile and, yes, Indonesia. But, of course, the story now goes well beyond Indonesia right to the heart of the so-called BRICs—onetime market darlings Brazil, Russia, India and China—that were supposed to represent a new sort of emerging market. Read Investors in emerging markets would like their money back now thanks here .
  • Marketplace Whiteboard: Fiat Currency Explained

    Here's a basic lesson in currency from Marketplace 's Paddy Hirsch . When the U.S. government moved away from the gold standard, there was a risk that people would not believe in the value of currency. This is where fiat currency comes in. And no, Hirsch points out, no cars are involved:
  • Ben Bernanke on Monetary Policy and the Gold Standard

    In a speech at the London School of Economics yesterday, Fed Chair Ben Bernanke discussed lessons from the financial crisis. Bernanke said the recent crisis was a "classic financial panic," and he gave a brief history lesson on exchange rates and developed economies moving away from the gold standard. The uncoordinated abandonment of the gold standard in the early 1930s gave rise to the idea of "beggar-thy-neighbor" policies. According to this analysis, as put forth by important contemporary economists like Joan Robinson, exchange rate depreciations helped the economy whose currency had weakened by making the country more competitive internationally.5 Indeed, the decline in the value of the pound after 1931 was associated with a relatively early recovery from the Depression by the United Kingdom, in part because of some rebound in exports. However, according to this view, the gains to the depreciating country were equaled or exceeded by the losses to its trading partners, which became less internationally competitive--hence, "beggar thy neighbor." Over time, so-called competitive depreciations became associated in the minds of historians with the tariff wars that followed the passage of the Smoot-Hawley tariff in the United States. Both types of policies were decried--and in some textbooks, still are--as having prolonged the Depression by disrupting trade patterns while leading to an ultimately fruitless and destructive battle over shrinking international markets. Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression. However, modern research on the Depression, beginning with the seminal 1985 paper by Barry Eichengreen and Jeffrey Sachs, has changed our view of the effects of the abandonment of the gold standard.6 Although it is true that leaving the gold standard and the resulting currency depreciation conferred a temporary competitive advantage in some cases, modern research shows that the primary benefit of leaving gold was that it freed countries to use appropriately expansionary monetary policies. By 1935 or 1936, when essentially all major countries had left the gold standard and exchange rates were market-determined, the net trade effects of the changes in currency values were certainly small. Yet the global economy as a whole was much stronger than it had been in 1931. The reason was that, in shedding the strait jacket of the gold standard, each country became free to use monetary policy in a way that was more commensurate with achieving full employment at home. Moreover, and critically, countries also benefited from stronger growth in trading partners that purchased their exports. In sharp contrast to the tariff wars, monetary reflation in the 1930s was a positive-sum exercise, whose benefits came mainly from higher domestic demand in all countries, not from trade diversion arising from changes in exchange rates. The lessons for the present are clear. Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not "beggar-thy-neighbor" but rather are positive-sum, "enrich-thy-neighbor" actions. Read the full speech here .
  • Marketplace Whiteboard: 'Why a currency war could hurt you'

    Marketplace 's Paddy Hirsch is back at the Whiteboard . This time he's trying to get us to understand how currency wars affect us all. As usual, he removes the wonk from the discussion. This time using a story of sibling rivalry, honey, and the US-Canada border:
  • Vox: 'Was the currency war inevitable?'

    Writing at VoxEU , Simon J Evenett --Professor of International Trade, University of St. Gallen in Switzerland-likens a currency war to a "rash" likely to break out depending on how policy makers respond to a global recession. But does that make currency wars inevitable? Evenett writes: Is it possible to design an economic recovery package that takes account of the lessons of history while doing the least possible harm – even potentially benefiting – foreign trading partners? For sure some won’t like this question, reasoning no doubt as follows: when (not if) monetary easing leads to economic recovery, the associated expansion in corporate and personal spending will increase demand for foreign goods and services – so in the long run everything will be hunky dory for trading partners, even with monetary easing. Still, the question is a good one because if there are plausible alternatives then (a) maybe the currency war was not inevitable or (b) the decisions not to pursue these policy alternatives points to underappreciated causes of the currency war. Taking as given that the effect of monetary easing on the exchange rate will harm, at least in the short run, foreign trading partners, what other complementary measures could have been taken to limit international tensions? One such measure would have been to combine monetary easing with expansionary fiscal policy. To the extent that the latter directly or indirectly (through supply chains, the demand for commodities, parts, and components, and induced private-sector capital formation) increased demand for imports then this would have offset, possibly fully, the impact of any currency depreciation by industrialised countries. Seen in this light, no wonder trading partners were worried that currency devaluations that accompanied austerity measures (restrictive fiscal policy) in industrialised economies further harmed their commercial interests. The adoption of austerity measures from 2010 closed the door on policy measures that could have mitigated the international tensions created by go-it-alone monetary easing by in the industrialised countries. There are other ways to bolster demand for foreign goods and services. Another road not taken in recent years was far-reaching trade and investment reforms, which would have provided a fillip to trade partners harmed by adverse currency movements. It is difficult to see how a package of extensive trade reform and monetary easing could have been received worse by trading partners than what actually came to pass. This is not the place to recount the trials and tribulations of completing the Doha Round, but it is worth noting that the unwillingness to further integrate the world markets has exacerbated today currency war. Read Root causes of currency wars here .
  • Knowledge@Wharton: 'Did Japan Just Spark a Currency War?'

    When the G20 meets later this week, avoiding a currency war will be one of the top issues for discussion . With Japan lowering the value of the yen, European nations are highly concerned that an artificially high euro (not just against the yen, but also against a relatively weak dollar) is exacerbating economic distress in the Euro Zone. In an interview with Knowledge@Wharton , Wharton School finance professor Franklin Allen explains how the actions of Japan's leaders might affect economies from Brazil to Russia:
  • World Economic Forum: 'Scenarios for the Future of the International Monetary System'

    As the global economy evolves, the globe's leading economies become more and more interconnected. Surely this has some impact on global currencies--with a focus on the dollar,yuan, and euro. Last year the World Economic Forum embarked on a study of the international monetary system. This study has resulted in a new report on the uncertainties that exist for global currencies and the potential scenarios for the future. Here is a video that sums up the findings of, and some of the key questions raised in, the report: Read Euro, Dollar, Yuan Uncertainties Scenarios on the Future of the International Monetary System here .
  • Christine Lagarde on Progress in Greece

    International Monetary Fund Managing Director Christine Lagarde tells Charlie Rose that, while a lot of hard work has been done by Greece's politicians and citizens, and Europe's policy leaders, there is much work to be done. And to avoid a deepening crisis the European partners, the private sector, and the Greek authorities have to work together. Here is an excerpt of Rose's interview with Lagarde: Watch the full interview here .
  • Rogoff on Greece's Future in the EU

    Following the announcement of the €130 billion ($171 billion) bailout of Greece, Der Spiegel interviewed Harvard economist Kenneth Rogoff . Like many economists, Rogoff believes Greece's leaders have a lot of work still to do. And he is firmly in the more austerity camp. He told Der Spiegel that he would recommend "The government in Athens should be granted a kind of sabbatical from the euro." In Rogoff's plan, Greece would still be in the EU, but out of the monetary union--at least until the country can lower its debt burden. Otherwise, he is not particularly optimistic that Greece will be able to remain in the EU. SPIEGEL: If Greece were to leave the euro zone, a wave of panic might engulf other countries struggling with debt, such as Portugal. How can we prevent the contagion from spreading? Rogoff: If Greece leaves the euro, the markets will demand sensible answers to two questions. First, which countries should definitely keep the euro? And second, what price is Europe prepared to pay for that? The problem is that the Europeans don't have convincing answers to those questions. SPIEGEL: What advice would you give Merkel and her counterparts? Should they tear the euro zone apart? Rogoff: No, certainly not. We are talking about bending not breaking, with one or more periphery countries allowed to leave temporarily in order to enjoy greater flexibility. There is currently no simple solution for this unparalleled crisis. The big mistakes were made in the 1990s. SPIEGEL: Does that mean the whole idea of the euro was a mistake? Rogoff: No, a common currency for countries like Germany and France was a reasonable risk, given the political dividends. But it was a grave mistake to bring all the south European states into the euro zone purely for reasons of political union. Most of them were not ready for it economically. SPIEGEL: That may well be, but the fact is that now they are part of the monetary union, and that can't simply be unravelled. Rogoff: Which is why there is only one alternative: Either the euro completely collapses -- with all the catastrophic consequences that would entail -- or the core members of the currency union manage to turn the euro zone into a genuine political union. Read the full interview here .
  • Terence Roth on the Bailout of Greece

    After twelve hours of meetings in Brussels, European Union leaders have agreed to a 130 billion euro ($170 billion) bailout of Greece . This was seen as a last minute deal to stave off Greek default. But there is much work to be done. As Dow Jones 's Terence Roth tells his colleague Nick Hastings , this agreement was essential because it gives Greece's leadership just enough time to do all it must do to avoid collapse.
  • Is the Euro Overvalued?

    The euro hit a two-month high against the dollar earlier this week, prompting some to wonder whether the currency is overvalued at the moment. Time will tell, but the ups and downs of the currency are nothing new. To mark moments in the young currency's history when it has been overvalued, INSEAD 's Antonio Fatas charted the dollar/euro exchange rate against the Purchasing Power Parity. (Note: Fatas used the German mark to estimate what the value of the euro would have been had the currency existed before 1999): Fatas: The Euro has fluctuated from a high value of 1.59 in July 2008 to a low value of 0.59 in February 1995. Are these numbers comparable? Not quite. Currencies are expressed in nominal terms so they are likely to move over time when inflation rates are not the same in both countries. In this particular case, we have witnessed an upward drift of the Euro over the years because inflation was on average lower in Europe. This trend can be captured by estimates of Purchasing Power Parity (PPP), in red in my chart. But even when we take into account this trend, the value of 0.59 in 1985 was a significant undervaluation of the Euro (the German Mark then) in comparison to PPP (around 0.95). Same for July 2008, the value of almost 1.6 represented a large overvaluation of the Euro relative to its PPP value (below 1.2). We also see in the chart that episodes of overvaluation or undervaluation relative to PP are persistent. A strong Euro in the late 70s was followed by a very weak Euro during most of the 80s. During the 90s the Euro was in general above PPP estimates. Before the official launch of the "real" Euro in 1999, the German Mark was already heading down and this trend continued leading to another episode of undervaluation of the Euro. An episode that was stopped by a join intervention of the US Fed and the ECB in November 2000. Since then the Euro became stronger and stronger until it reached its peak of 1.6 in July 2008. So, Fatas sees the euro as overvalued today, though not at an historically unprecedented level. Read The overvalued Euro here .