Matt Nolan

What is this …

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This article on Bloomberg is something I largely disagree with – however, there is statement that needs more discussion.

Quantitative easing is “terrorizing” the world economy and will lead to depreciation of the U.S. dollar, pushing down prices in Europe and exacerbating the continent’s sovereign debt crisis, Mundell said.

The European Central Bank’s mandate to control inflation would likely hamper it from stemming the euro’s rise, while the currency’s gains would “likely lead to deflation,” said Mundell, who received the prize in 1999 and is known as the intellectual father of the euro. Falling prices would increase “the real value of indebtedness.”

Mundell is a genius, and one of the intellectual fathers of open economy macro, but what is this.

He is saying the the ECB won’t loosen policy because it fears inflation, but a rising euro will lead to deflation.  By the same logic, shouldn’t the ECB loosen policy to prevent deflation.  The same logic.  What the …

On the Chinese side, I disagree with the majority of what they are saying.  But:

The U.S. “has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.”

Is a fair point.  Places where credit institutions are weak could be at risk in the case where global monetary policy is softened.  IMO, this implies that there should be more pressure on these places to make risks transparent and to work on institutional setting – not that countries facing deflationary pressures should just ignore them.

If the institutional setting is appropriate, then loosening global monetary policy in the face of higher than “natural unemployment” rates is a good thing both in terms of:

  1. Meeting inflation targets and ensuring that the deviations from the “natural rate” are as small as is efficient.
  2. Pushing countries who have an inflation mandate but have been fiddling the currency to either revalue OR force them to take on greater capital controls – which will also lead to larger asset losses for them.

I’m unsurprised China is not impressed – if the US is devaluing they face a loss on the capital value of their reserves.  This does not mean that it isn’t good policy – and if they are going to fiddle exchange rates this is a risk they had to face!

Matt Nolan

Chocolate and prices

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An article in the Herald says some interesting things:

The world could run out of affordable chocolate within 20 years as farmers abandon their crops in the global cocoa basket of West Africa, industry experts claim.

…

“In 20 years chocolate will be like caviar. It will become so rare and so expensive that the average Joe just won’t be able to afford it.”

Now, as the article says, the price of cocoa is rising because alternative uses of the same land is also rising – this is not surprising, and is really what should occur.  We have scarce resources, and the price adjusts to signal this scarcity and allocate resources to the highest bidder.

But the first claim, running out of cocoa?  Surely if prices rise, this will get some people back into the market.  We don’t just magically run out of the thing – the price of cocoa relative to say washing machines should rise, but this is because the opportunity cost of growing cocoa is now higher.  Also note that these poorer farmers in Africa are getting higher incomes now – as the price of what they produce compared to, say washing machines, is higher … so they can buy more washing machines.  Why is this article begrudging them that?

And the second claim – that chocolate will be like caviar.  WTF.  I am pretty sure we would see a massive amount of entry into the market if cocoa prices went up that far – entry that will drive the price down.  When “John Mason, executive director and founder of the Ghana-based Nature Conservation Research Council” makes that claim about people not being able to afford chocolate I think he is forgetting that part of the equation.

I find these articles weird.  In a much smaller space they could have said:

With the price of agricultural crops rising, some farmers are switching crops, driving up the price of cocoa relative to non-agricultural goods and services.  This will see the price of chocolate rise – time to finally find out is white chocolate really chocolate.  This will also increase the incomes of farmers in these regions.

Matt Nolan

Neuroscience, determinism, and free will

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The title sounds serious, but I am (sadly) not capable of steering into too much detail in this subject matter.  However, given that I have a rising interest in neuroeconomics I felt I should type something out about this quote (ht Andrew Sullivan):

Dualists about the mind and brain – those who hold that there are thinking substances like souls in the world as well as all the ordinary physical stuff – say that the mind sees and thinks and wants and calculates. Contemporary neuroscience dismisses this as crude, but Hacker argues that it just ends up swapping the mind with the brain, saying that the brain sees and thinks and wants and calculates. He says, “Merely replacing Cartesian ethereal stuff with glutinous grey matter and leaving everything else the same will not solve any problems. On the current neuroscientist’s view, it’s the brain that thinks and reasons and calculates and believes and fears and hopes. In fact, it’s human beings who do all these things, not their brains and not their minds. I don’t think it makes any sense to talk about the brain engaging in psychological or mental operations.”

Read more

Matt Nolan

Monetary policy and the sun

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If you can follow the idea that price setting is a co-ordination game, you can see one of the reasons why monetary policy has real effects.  When economists discuss “menu costs” as a major reason for prices not changing, they are primarily thinking of this strategic element (where there are multiple, pareto ranked, stable and state dependent eqm) – even though it isn’t really a traditional menu cost at all, and how it interacts with menu costs is of more interest.

Sure, when we think about the labour market we enjoy talking about the “relative price of labour” and using monetary policy to make “labour relatively cheaper” – in fact a co-ordination game argument can be used here.  But the existence of a co-ordination game where the “relative price of goods” is held up too high is also important.  As long as prices are “state dependent” monetary policy has traction (even if physically prices are completely flexible!).

I had never heard the daylight savings analogy before, but I like it.

Update:  Economist’s View points to Romer’s graduate macro text where this is discussed.  It is a useful rundown but:

If there were literally no cost to changing nominal schedules and communicating this information to others, daylight saving time would just cause everyone to do this and would have no effect on real schedules

This statement is true, but it is worth fleshing out.  The “communicating” issue here is important methinks – as there are multiple Nash Equilibrium, and there may be uncertainty regarding the value other firms place on different ones.  If firms could communicate, or had knowledge about each others payoffs, and if there was a single Pareto superior eqm – firms would turn around and set prices in this way.

There can be zero cost to changing prices – but the fact that we have a co-ordination game with uncertainty implies that we can slip into an inferior equilibrium.  Furthermore, even with full information – if the equilibrium aren’t pareto ranked, but can be ranked on the basis of welfare, there can still be a justification for intervention.

I always felt that the fact that monetary policy has scope even in the face of fully flexible prices is something worth recognising.

Matt Nolan

Policy analysis presentations

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No Right Turn points to a “does inequality matter” workshop thing.

Very good, I would be keen to go except – it is over a work day.  It takes up an entire Tuesday, from 8.30am to 5pm.  It is set up so that it is on at a time when lots of people have to work.

This brings me to my point – why are these workshops never on weekends, or after work.  I generally can’t manage to take time off – I’m working on weekends enough as it is [Note:  Although I am going to the sustainability conference on Friday November 12, as I wanted to keep abreast of potential policy movements here].

Anyway, that is enough of me whining – just wanted to illustrate my disappointment that I can’t get to so many of these things 🙁

Matt Nolan

Dumb statement of the week

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Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” (Jim) Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday

From here.

Look, the guy can disagree with Federal Reserve policy – it would be nice if he actually explained why – but even if he doesn’t he can.  But saying that one of the worlds top economists doesn’t understand economics really just shows that he doesn’t understand the discipline of economics.

Hey, he can disagree with the discipline of economics – but without understanding it how can he say that someone else doesn’t?

And when he says “debasing your currency” he shows his true colours – he doesn’t understand monetary policy or inflation targeting.  There is no “magic” value for money, it isn’t some god given level of what it should be.  The whole point of “printing money” at the moment is because inflation is below their target, their mandate is to hit a certain level of inflation, and by default they need to increase how stimulatory policy is to do that – if QE2 appears to be the wrong way of doing this, or will lead to unintended consequences, then criticise it on those grounds FFS.

As an investor I’m sure he understands investing – but this sort of attack on Bernanke indicates that he might not have the same level of mastery in economics.  Ben Bernanke might not be as good at investing – but he is one guy I’d sure listen to when it comes to economics.