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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 :
  • Frankel on the Resilient Dollar

    During the Great Recession, we were starting to come to terms with a weakening U.S. global economic position. And we saw the dollar lose ground (though it remained the chosen global currency). Well, the currency seems to be regaining that ground. At Project Syndicate , Jeffrey Frankel writes that the dollar will likely be replaced as the top currency someday. "But today is not that day." The International Monetary Fund’s most recent statistics suggest, unexpectedly, another pause in the dollar’s long-term decline. According to the IMF, the dollar’s share in foreign-exchange reserves stopped falling in 2010 and has been flat since then. If anything, the share is up slightly thus far in 2013. Similarly, the Bank for International Settlements (BIS) reported in its recent triennial survey that the dollar’s share in the world’s foreign-exchange trades rose from 85% in 2010 to 87% in 2013. Given dysfunctional US fiscal policy, the dollar’s resilience is surprising. Or maybe we should no longer be surprised. After all, when the global financial crisis erupted in 2008 from the bowels of the American subprime-mortgage market, global investors responded by fleeing to the US, not from it. They obviously still regard US Treasury bills as a safe haven and the In particular, the euro has its own all-too-obvious problems. Indeed, the euro’s share in reserve holdings and foreign-exchange transactions have both declined by several percentage points in the most recent statistics. At the same time, the IMF’s data indicate that the vaunted renminbi is not yet among the top seven currencies in terms of central-bank reserve holdings. And, according to the BIS, while the renminbi has finally broken into the top ten currencies in foreign-exchange markets, it still accounts for only 2.2% of all transactions, just behind the Mexican peso’s 2.5% share. Despite recent moves by the Chinese government, the renminbi still has a long way to go. To try to explain the recent stabilization of the dollar’s status, one might note something that the last three years have in common with the previous period of temporary reversal from 1992 to 2000: striking improvements in the US budget deficit. By the end of the 1990’s, the record deficits of the 1980’s had been transformed into record surpluses; today, the federal deficit is less than half its 2010 level. Read The Dollar and Its Rivals here .
  • Jeffrey Frankel: Drama Over Currency Wars More Manipulated Than Currency Values

    At next week's G8 summit in Northern Ireland, leaders from the world's dominant economies will discuss concerns over currency devaluation practices--or what we have come to describe, sensationally, as "currency wars." Jeffrey Frankel sure that leaders should really spend much time in the issue. And he seems pretty sure that the term "currency wars" is not an accurate description of recent monetary behavior. From Project Syndicate : True, in recent years, a wide array of countries has indicated a preference for weaker currencies as a means of improving their trade balances. It is also true, by definition, that not everyone can depreciate or improve their trade balance at the same time. But that does not necessarily mean that depreciators are guilty of violating any agreements or norms, especially if they have merely maintained a pre-existing exchange-rate regime. Uncoordinated monetary expansion does not even necessarily leave the world in a worse equilibrium. Barry Eichengreen and Jeffrey Sachs have persuasively argued this for the 1930’s (the opposite of the conventional wisdom regarding beggar-thy-neighbor competitive devaluations). Although all countries could not improve their trade balances simultaneously, when they devalued against gold, they succeeded in raising the price of gold, thereby increasing the real value of the global money supply – exactly what a world in depression needed. The same applies today. Brazil’s finance minister, Guido Mantega, coined the term “currency wars” in response to American efforts to enlist Brazil and other competitors of China in a campaign for a stronger renminbi. But the accusation against the US is especially misplaced. US monetary expansion contributed to global monetary expansion at a time when, on average, it was needed. US authorities have not intervened in the foreign-exchange market or talked down the dollar, and currency depreciation was not the Fed’s goal when deciding to implement its quantitative-easing policy. Read All Quiet on the Currency Front 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:
  • Happy Birthday to the $20 Bill

    The new twenty dollar bill turns 10 years old today. When the twenty was updated, it represented a significant shift in how US currency looks and feels. Now the one hundred dollar bill is poised to follow the twenty's lead, by adding new color and material to make it more difficult to forge. Mark Garrison discussed the importance of the twenty's pioneering look on the Marketplace Tech Report:
  • When it Comes to Publicly Held U.S. Currency, It's All About the Benjamins

    There are a lot of U.S. bills in circulation. $1.2 trillion worth. And most of them, as James Hamilton points out at Econbrowser , are of the $100 variety. Benjamin Franklin adorns 75% of all the bills in public circulation. That may be hard to believe for those of us who don't regularly see 100-dollar bills being exchanged. But there is a reason for that. Hamilton: A recent paper by Federal Reserve economist Ruth Judson uses a variety of methods to infer that many of those $100 bills are being held outside the United States, where U.S. currency is sometimes regarded as a safer store of value than other local options. This is a long-standing trend that seems to have accelerated during the financial crisis. Judson estimates that about half of the growth since 1988 in currency held by the public has ended up outside the United States. That growth represents one important benefit that the U.S. has received from having a currency that is regarded as a safe and stable store of value. In effect, the growth in foreign-held dollars has meant that the U.S. government has been able to buy hundreds of billions of dollars worth of goods and services without ever needing to tax its own citizens or borrow in the form of interest-bearing Treasury securities. Which is a great deal, as long as those foreign holders don't change their minds and try to dump that currency back on us. Read Who is holding all those U.S. dollars? here .
  • Economic Policy Lessons From the Byzantine Empire

    At The Guardian , Peter Frankopan laments the fact that politicians in Europe are happy to use the term "Byzantine" but seem to know little about Byzantium, the empire that ruled much of Southern Europe, North Africa, and the Middle East for over 1000 years after the fall of Rome. Frankopan, director of Oxcrord Centre for Byzantine Research, argues there are useful lessons for today's leaders, in both Byzantine successes and failures. There was no question that different parts of the empire could have different rules or different taxation policies: for the state to function with a single currency, there had to be fiscal, economic and political union; taxes had to be paid out from the periphery to the centre; and it was understood that resources had to be diverted from rich regions to those that were less well blessed – even if not everyone was happy about it. Freedom, grumbled one author in the 11th century, meant freedom from taxes. If Eurocrats could learn from the structure of the empire, then so too could they benefit from looking at how it dealt with a chronic recession, brought on by the same deadly combination that has crippled western economies today. In the 1070s, government revenues collapsed, while expenditure continued to rise on essential services (such as the military); these were made worse by a chronic liquidity crisis. So bad did the situation become that the doors of the treasury were flung open: there was no point locking them, wrote one contemporary, because there was nothing there to steal. Those responsible for the crisis were shown no mercy. The Herman Van Rompuy of the time, a eunuch named Nikephoritzes, was lambasted by an angry population faced with price rises and a fall in the standard of living, and was eventually tortured to death. Widespread dissatisfaction led to others being unceremoniously removed from position, often forced to become monks, presumably so they could pray for forgiveness for their sins. The crisis even gave rise to a Nigel Farage figure, whose arguments about why things had gone wrong sounded "so persuasive", according to one contemporary, that people "united in giving him precedence" and welcomed him everywhere with applause. He was a breath of fresh air at a time when the old guard were paralysed by inaction and by a dire shortage of good ideas. His message, that the current crop of leaders was useless, was hard to argue with. Read the full post here .
  • Draghi: 'Euro area is much, much stronger than people acknowledge'

    Mario Draghi has had a challenging eight months as president of the European Central Bank . But to hear him speak yesterday from the Global Investment Conference in London one would think him quite the optimist. Draghi laid out the case for the euro in spite of all the drag on the currency from debt-ridden nations in the euro zone. If you compare today the euro area member states with six months ago, you will see that the world is entirely different today, and for the better. And this progress has taken different shapes. At national level, because of course, while I was saying, while I was glorifying the merits of the euro, you were thinking “but that’s an average!”, and “in fact countries diverge so much within the euro area, that averages are not representative any longer, when the variance is so big”. But I would say that over the last six months, this average, well the variances tend to decrease and countries tend to converge much more than they have done in many years - both at national level, in countries like Portugal, Ireland and countries that are not in the programme, like Spain and Italy. The progress in undertaking deficit control, structural reforms has been remarkable. And they will have to continue to do so. But the pace has been set and all the signals that we get is that they don’t relent, stop reforming themselves. It’s a complex process because for many years, very little was done – I will come to this in a moment. But a lot of progress has been done at supranational level. That’s why I always say that the last summit was a real success. The last summit was a real success because for the first time in many years, all the leaders of the 27 countries of Europe, including UK etc., said that the only way out of this present crisis is to have more Europe, not less Europe. A Europe that is founded on four building blocks: a fiscal union, a financial union, an economic union and a political union. These blocks, in two words – we can continue discussing this later – mean that much more of what is national sovereignty is going to be exercised at supranational level, that common fiscal rules will bind government actions on the fiscal side. Read the full speech here .
  • James Surowiecki's 'Brief History of Money'

    We have always appreciated the clarity and brevity that James Surowiecki has brought to complicated business and economics issues on The New Yorker's Financial Page. He spilled a lot more ink (or at least text) in his recent article on the history of money. In Spectrum magazine, Surowiecki charts the use of money from the 7th century B.C.E kingdom of Lydia, through Kublai Khan's introduction of paper money, up to online trade today. Here is an excerpt: By the 12th century, even as the Chinese were experimenting with paper currency, Europeans began to embrace a new view of money: Instead of being something to hoard or spend, money became something to invest, to be put to work in order to make more money. This idea came with a renewed interest in commerce. Trade fairs sprang up across Europe, frequented by a community of merchants who had begun to do business across the continent. This period also saw the emergence of a banking industry in the city‑states of Italy. These new institutions introduced a host of financial innovations that we still use today, including municipal bonds and insurance. The banks fostered the use of credit and debt, which became ever more central to the economy as kings borrowed to finance their military adventures and merchants borrowed to fund their long-range trades. The invention of the bill of exchange, which laid the groundwork for the emergence of paper money in the West, also occurred during this period. The bill of exchange was a sort of precursor to the traveler’s check: a document representing a quantity of gold that could be exchanged for the real thing in a different city. Traveling merchants liked the bills because they could be carried around with far less risk (and exertion) than the precious metal. By the 16th century in Europe, many of the ideas about money that shape our thinking today were in place. Still, money remained a physical thing—that thing being a piece of gold or silver. A gold coin wasn’t a symbol of value; it was an embodiment of it, because everyone believed that the gold had intrinsic worth. Likewise, the amount of money in the economy was still a function of how much gold and silver was available. The rulers of Spain and Portugal didn’t quite appreciate the limits of this system, however, which led them to plunder their New World colonies and accumulate vast hoards of precious metals, which in turn triggered periods of rampant inflation and enormous tumult in the European economy. Read the full article here . And after you've read the article, take a look at the timeline that Spectrum has put together. Here's a snapshot: Hat tip to Barry Ritholtz for calling our attention to this article.
  • Daniel Altman's Gold Standard Primer

    Ron Paul was not very successful in his effort to win the Republican nomination for president, so it seems there is not much of a chance that the US will return to the gold standard anytime soon. And yet discussion of the gold standard still seems in the air. Enough so that Big Think 's Chief Economist Daniel Altman has decided to break down some of the myths of the gold standard.
  • Marketplace Whiteboard: The Problem with Spain

    Paddy Hirsch tells us that Spain is causing big problems because, to put it simply, Spain is so big. At least compared to dear old Ireland. And to help us get our heads around the damage that Spain's debt crisis could cause fellow EU nations (and the global economy, for that matter), Hirsch wants us to think of Spain as a homeowner:
  • Marketplace Whiteboard: Cash, Hearts, and the Danger of Bank Runs

    In his effort to explain why bank runs are so bad, Paddy Hirsch wants us to think about banks as hearts. No, not banks having hearts. Rather, banks having responsibility to a lot of people and institutions, just as a heart has responsibility for getting blood to all the organs. Take a look at the latest Marketplace Whiteboard :
  • Eichengreen on the Dollar's Special Status

    Writing in the May/June issue of The American Interest , Barry Eichengreen argues that while the role of the dollar on the global economic stage is likely to diminish somewhat, it will be some time before we see any significant drop in the greenback's importance. But he uses recent currency maneuverings in China and Japan to outline some of the benefits we in the US receive from the dollar being the global currency. With international business being conducted in dollars, U.S. banks aren't burdened with a lot of the exchange rate machinations that banks elsewhere deal with. And the U.S. Treasury costs of borrowing are lessened by the stability that the dollar offers. And on the political front, Eichengreen points to " America’s unique ability to provide dollars in unlimited quantities, but also to withhold them, provides U.S. foreign policymakers with another pressure point to push." But Eichengreen points out that there are some downsides to the dollar being the global currency. By U.S. Treasury estimates, China holds some $1.1 trillion in U.S. government bonds. Total official foreign holdings exceed $3.2 trillion, nearly a third of the $10 trillion of U.S. Treasury debt held by the public. It is worth noting that these official figures are almost certainly underestimates. In addition to purchases in the United States, which are tracked by the U.S. Treasury, governments and central banks can purchase U.S. Treasury bonds through intermediaries in foreign centers like London, where they are harder to detect. Foreign central banks also hold the securities of government-sponsored agencies like Freddie Mac and Fannie Mae, although they have trimmed those holdings since the subprime crisis. If by purchasing U.S. Treasury bonds foreign central banks can lower U.S. interest rates by as much as a full percentage point, then they could, by curtailing those purchases, presumably raise U.S. rates by a corresponding amount. The U.S. housing market and construction sector would feel the pain. This would be a not-so-subtle way for China to make known its displeasure with U.S. policy toward North Korea or Iran, or with a U.S. Treasury decision to label China a currency manipulator. The benefits that America derives from Chinese purchases of U.S. debt are a factor in the State Department’s reluctance to push Beijing harder on human rights issues and the Treasury Department’s reluctance to push it harder on the exchange rate issue. In principle, China could go further and sell its previous purchases. Given the magnitude of its holdings, this would cause bond prices to crater and U.S. interest rates to spike. Smaller bond market shocks than that have caused financial mayhem in the United States. Consider the 1.5 percent rise in thirty-year Treasury yields that occurred in 1994 when Japanese investors faced with a financial crisis at home sold off their U.S. holdings. The result was serious losses and fears of insolvency of major financial companies and hedge funds. If the Chinese wished to wreak havoc in U.S. financial markets, this would be the way. The deterrent to China’s doing so is that it might also be wreaking havoc in its own markets. When institutional investors in Japan sold off some of their U.S. treasuries in 1994, driving down the price, they suffered losses on their remaining holdings. This heightened concern about the solvency of not just U.S. financial firms but Japanese financial institutions as well. China would face an analogous problem. Eichengreen goes on to outline reasons such behavior would create problems for China's economy, so no need to get alarmist. The article as a whole raises a series of interesting discussion points on the impact of the dollar's global status on the U.S. economy and business. Read The Once and Future Dollar here . (Hat tip, Greg Mankiw )
  • It's All About the Washingtons, Until It's Not: Planet Money on the Dollar Coin

    The Planet Money team wants us to spend more time thinking about the money in our pockets. Not the amount, but rather the type of money in our pockets. And not what that money represents, but the actual dollars and coins. The paper and the metal. If legislation currently moving through Congress passes, you will have to say goodbye to a lot of George Washingtons, Take a listen to the latest Planet Money podcast, in which they lay out the battle between the dollar coin and the dollar bill in some creative ways (including getting dollar-coin proponent Sen. Tom Harkin to discuss the virtues of the coin at a vending machine):