How exactly should the West “rethink”

I’m not quite sure how to take these comments by Gareth Morgan – once they’ve written up some more details of their experience they will likely point out that they are talking about the individuals and communities in North Korea.  In this way they will be talking about the amazing way these people are trying to work through hardship – something that doesn’t get enough play in the West.  And I appreciate that.

However, what they’ve decided to say in this brief post was one of the clearest example of beating on the West because it is fashionable – there is a line between showing a respect for those who are struggling, and trying to switch the blame away from a corrupt regime and onto everyone else:

What they found surprised them – a people who were poor, yes, but wonderfully engaged, well-dressed, fully employed and well informed. In Gareth’s view, what North Korea has achieved economically despite its lack of access to international money has been magnificent.

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The new Bank of Japan

Look at that, the Bank of Japan has joined other central banks in announcing an explicit inflation target, and doing all they can to show their credibility for achieving it.


Some will call this a currency war, or “monetization” – but again, this is the Bank targeting a specific inflation target in a forward looking manner.  This is what they should have been doing all along – and given it is a rule, it helps set expectations and acts as a “no-monetization” condition.

Some will say this destroys central bank independence.  I would note that the purpose of independence is to sovle “time inconsistency” in central banks – rule based policy does this fine.  It would only be a problem if the Japanese government tried to force them to violate the rule.

New Zealander’s will complain about the dollar.  Remember here that the BOJ has commited to inflation of 2%pa (where previously it was expected to, on average, be lower).  The return on holding a Yen has become more negative per year … and so the asset price of the Yen much fall.  This is what has happened, however the price inflation will ensure that the real exchange rate trends back to its true level.  Remember, the exchange rate is a price, and we need to think about the primitive causes of any issue in order to figure out if there is one.  The BOJ actually doing normal monetary policy isn’t negative for NZ – although it will sting the bottom line of people trying to sell to Japan in the near term (hola Rio Tinto).

PostsMoney Illusion, Market Monetarist. (Where is the rest of the blogsphere, a credible commitment by the BOJ is actually a massive event … I haven’t seen much in the way of posts yet though.

The attempt to make everything a “generation war”

Via Blaise Drinkwater (on Google+ of all sites!) was this link from Marginal Revolution.  The generational war component comes through this:

By speeding the flood of less expensive imported products into Japan, the strong yen is contributing to a broader drop in the prices of goods and services, known as deflation, that has helped retirees stretch their pensions and savings. The resulting inaction on the yen, according to a growing number of economists and politicians, reflects a new political reality, with already indecisive leaders loath to upset retirees from the postwar baby boom who make up nearly a third of the population and tend to vote in high numbers.

To me, this comment is relatively nonsensical for two reasons.

Firstly, The Yen has “strengthened” from an incredibly weak level in 2007 – incredibly weak by historic standards!  Yes the Yen is now strong against the US dollar, but if you compared it to a wider basket of currencies this is hardly the case.

When talking about currency, historical context isn’t particularly useful.  Instead we need to ask things such as “what is purchasing power parity like” and “are they running a trade surplus”. It turns out that Japan is still running sizable trade surpluses, suggesting that (if anything) the Yen may still be too weak …

My second complaint is this view of the Yen and inflation – inflation is the growth in the general price level over time, a “high Yen” is a one-off price level shock … it doesn’t change the rate of growth in the general price level it merely knocks down the level as a one-off.  The endemic deflation in Japan isn’t a result of “fiddling with tradable prices”, it is the result of persistent deflation expectations feeding into the wage and price setting behaviour in the country.

Now if there is a generational war in this context, it relies on Japan’s pensions not being inflation adjusted.  Is this the case?  If not, this is much ado about nothing.


Is that an inflation target …

Or are you just flirting with me Bank of Japan?

In truth the BOJ has tried to hold back from an explicit 1% inflation target, and is just discussing it as a “near term goal”.  While this isn’t as positive as the Fed move to an explicit inflation target, and Australia and New Zealand’s long-term policy of having an explicit inflation target and printed rate track, it is an improvement.

With Fed and BOJ policy improving, credit markets in Europe consistently settling since mid-December, implied volatility on markets way down (the VIX), and the cost of credit down significantly in the past 6 weeks we could be seeing a real improvement on financial markets.

What does that mean in little old New Zealand?  Well our higher exchange rate is tempering part of any stimulus coming from offshore, while its up to the RBNZ to keep an eye on the rate track.  If financial conditions look like they are going to improve in the near future the Bank may suggest that they will be lifting rates in larger chunks when they do get around to it.  It will be interesting to see what happens when we get to the March meeting.

Should the US really keep blaming the exchange rate with China?

Bemoaning the Chinese exchange rate when talking about the structure of the US exchange rate is looking increasingly unreasonable.  I don’t think either country should be messing around with trade policy and intervention, and I think they are both doing irresponsible things.  But if we are just going to look at the exchange rate lets actually look at it (thanks FRED).

Take into account that inflation has been stronger in China than it has in the US, and you get a story where the real exchange rate is probably lower than it was in 1994!

China is buying up US bonds at an incredibly low rate of return, as long as US isn’t “pissing the money in the wind” I can only see this sort of action hurting China – not the United States.  If the US is going to criticise China for creating and now maintaining “imbalances” I would like a slightly more sophisticated argument than “look at the exchange rate”.

How about “look at the artificially low rates of return in the past due to excessive artificial savings” – you make that argument, and it becomes obvious that fighting against China loosening global monetary conditions during a period where the world is suffering from tight money (even with amazingly low interest rates – as the equilibrium real interest rate has dropped markedly) and the  developed economy’s central banks wont doesn’t really make sense …

Protectionism: What the ….

The US is pushing to start introducing duties on Chinese goods to make a “level playing field” given the currency “misalignment.

Hold up a second.  China maintains a “low” exchange rate by “saving” too much – and using that savings to do things like by US currency and bonds right.  Any subsidy on Chinese exports is “implicit”.

If  this is indeed the case, introducing duties is not the way to go about things – and by ignoring the central issue it will at best lead to an uncomfortable situation and poorer US consumers, and at worst will lead to a full scale trade war and a severe economic crisis.

If you think that having China save excessively creates risks to your own economy (as that sort of subsidy actually sounds pretty welfare enhancing in a direct sense – so we need to think about risks), then deal with it directly – eg by taxing capital flows from that specific country.  Don’t start rubbish protectionism.