tag:blogger.com,1999:blog-69489825215011077522024-02-21T01:25:57.976-05:00Rogue Economist Rantsconventional approaches, unconventional conclusionsRogue Economisthttp://www.blogger.com/profile/03439817966760459091noreply@blogger.comBlogger23913tag:blogger.com,1999:blog-6948982521501107752.post-45813938833574536362022-04-06T10:20:00.004-04:002022-06-23T21:41:52.149-04:00Will paying for Russian Oil and Gas in roubles result in the fall of the dollar as global reserve currency?<p> </p><p class="MsoNormal">Will paying for Russian Oil and Gas in roubles result in the
fall of the dollar as global reserve currency?<o:p></o:p></p><p class="MsoNormal"><b>Background on Russia's invasion of Ukraine</b><o:p></o:p></p>
<p class="MsoNormal">For various reasons <a href="https://www.youtube.com/watch?v=If61baWF4GE">related to geopolitics</a>, last February,
Russia invaded Ukraine. <span style="mso-spacerun: yes;"> </span>To avoid
potential escalation into World War 3, the United States and its western allies
decided to pinch Russia where it hurts, while avoiding launching an outright
war with Russia, a nuclear power – its economic lifeline.<span style="mso-spacerun: yes;"> </span>They launched economic and financial
sanctions with the stated aim of crippling Russian capacity for a protracted
war, and to depower Putin and his billionaire supporters.<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal">The sanctions regime included sanctions on Russia’s largest
banks, and freezing of their dollar assets held in western banks. This resulted
in Russia being unable to access its vast hoard of dollar and Euro reserves,
which it had accumulated through sales of its commodities to the West, and
which it had counted on to prop up its economy, its currency, and fund its
military campaign.<span style="mso-spacerun: yes;"> </span>The goal was precisely
that, to cut the source of funds to further its campaign in Ukraine.<o:p></o:p></p>
<p class="MsoNormal">Sanctions however stopped short of fully cutting off all
trade and economic ties with Russia. Russia after all supplied much of Europe’s
oil and gas requirements. Which gave Russia the loophole it needed to get
around the sanctions on its banks.<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal">Russia could therefore continue to earn hard currency while
it continues to sell its oil and commodities to Europe. However, as long as
these continued to be transacted in dollars and euros, these will be coursed
through Western controlled banks and clearing bodies, which are subject to US
and European laws and policies, of which the escalating bank sanctions on
Russian banks are part. By transacting the sales in roubles, buyers are forced
to source roubles to pay for their oil and gas, and roubles can only be <a href="https://www.dw.com/en/russia-gas-payments-must-be-made-via-russian-bank-accounts/a-61319393">sourced in quantity at Russian banks</a>.<span style="mso-spacerun: yes;"> </span>By
effectively transferring the venue of exchange from western controlled to
Russian-controlled banks, Russia effectively limited the potency of the bank
sanctions.<span style="mso-spacerun: yes;"> </span>The West cannot now further escalate
the sanctions to all Russian banks, as this would effectively cut Europe’s
ability to source these needed commodities from Russia.<span style="mso-spacerun: yes;"> </span>They can, but at great risk tom causing
prolonged recession in their home economies, and potentially weakening their
domestic political clout.<o:p></o:p></p>
<p class="MsoNormal">By <a href="https://apnews.com/article/russia-ukraine-putin-business-germany-europe-f9f4132e84bee437d82cb9f51c58aa8e">transacting sales in roubles</a> going forward, this will create
new greater demand for roubles that was not there before. Whereas before,
Russia was content to just accumulate dollars and euros, occasionally
converting them to roubles as domestic transactions required it, while hoarding
the rest as global reserve, now it’s the western nations who will need to
accumulate roubles, so that they can continue buying Russian commodities.<o:p></o:p></p>
<p class="MsoNormal">This can be viewed as an increase in international value of
the rouble, and decline in the use of the dollar and euro.<o:p></o:p></p>
<p class="MsoNormal"><b><br /></b></p><p class="MsoNormal"><b>Background on dollar’s rise as global reserve currency</b></p>
<p class="MsoNormal">The dollars rise to global reserve status is widely accepted
to start from the end of World War 2, when due to the widespread destruction of
European economies and industry during the war, only <span style="mso-spacerun: yes;"> </span>US manufacturing prowess remained intact, and the
US had the financial capability to supply much of Europe’s and the world’s,
needs.<span style="mso-spacerun: yes;"> </span>This resulted in countries’
increased demand for the currency, demand which continued to rise even as
Europe started to become resilient again.<span style="mso-spacerun: yes;">
</span><o:p></o:p></p>
<p class="MsoNormal">Much of the world’s trade was done in dollars, or were
quoted in dollars, because for a long time, the US was the only country with a
stable enough financial system, that it became a self-reinforcing condition to conduct
international trade in dollars. As more trade was done in dollars, this created
more demand for dollars, which resulted in the dollar being preferred for more
trades.<o:p></o:p></p>
<p class="MsoNormal">Because the dollar was the default currency for most global
trade, it then logically also became the default reserve currency preference of
most nations.<span style="mso-spacerun: yes;"> </span>In lieu of accumulating
gold, as the global consensus for acquiring wealth, acquiring dollars became
the norm for many countries that started to accumulate surpluses from trade.<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal"><b>2008 onwards</b><o:p></o:p></p>
<p class="MsoNormal">The most serious threat to the global acceptance of the US
dollar as default reserve currency was during the 2008 crisis, as widely
covered at the time on this blog.<span style="mso-spacerun: yes;"> </span>When
large financial institutions in the US started blowing up, the US had to
respond by propping up measures such as quantitative easing and the fall of
interest rate to the zero bound.<span style="mso-spacerun: yes;"> </span>This
resulted in a lot of people speculating that the US will print the dollar til
it loses all value.<span style="mso-spacerun: yes;"> </span>I <a href="https://rogueeconomistrants.blogspot.com/2011/12/why-does-capital-not-go-to-where.html">argued</a>, against
<a href="http://rogueeconomistrants.blogspot.com/2011/11/similarity-of-chinas-usd-peg-with-euro.html">such</a>, <a href="https://rogueeconomistrants.blogspot.com/2011/08/will-countries-stoip-investing-their.html">assertions</a> on this blog, and so far, until now, 14 years later, the dollar
has not yet to lose value like Zimbabwe’s currency, despite rolling out the
largest stimulus ever in history in 2020.<span style="mso-spacerun: yes;">
</span><o:p></o:p></p>
<p class="MsoNormal">Since 2008 however, this widespread speculation contributed
to many trends, including the rise of Bitcoin and cryptocurrencies; the hunt
for alternative currencies that can diversify central banks’ reserve baskets;
and greater speculation in ‘scarce’ assets that will increase in value when
valued in the dollar losing value.<o:p></o:p></p>
<p class="MsoNormal">Many speculated that the Chinese yuan could take the place
of the dollar as the default standard, given China’s meteoric rise in global
trade.<span style="mso-spacerun: yes;"> </span>But since China continues to
control the supply of yuan, and maintains its peg to the dollar, the yuan has
not been the threat to the dollar as some have thought.<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal"><b>Where China and Russia still fall short</b><o:p></o:p></p>
<p class="MsoNormal">This is I believe is the quagmire Russia will find itself in.<span style="mso-spacerun: yes;"> </span>Will they allow the rouble to be freely
available anywhere in the world, and allow it to feely float, as the US does
the dollar?<span style="mso-spacerun: yes;"> </span>What happens when a rising
rouble makes their exports more expensive, or a falling rouble makes imports too
costly for local consumers? Will they allow market forces to dictate, or will
they intervene heavily, as China does?<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal">A further competitive advantage the US has, that allows them
to freely float the dollar globally, is that the US had a large domestic
market, which decreases their reliance on exports, lower than other countries’ level
of reliance to theirs.<span style="mso-spacerun: yes;"> </span>The US has also always
been an innovative economy, that always had a lot of things to sell, and by the
time a rising dollar was making the exports of yesteryear highly expensive,
they were already on to their next exporting star, and gladly outsourced production
of expensive goods elsewhere.<o:p></o:p></p>
<p class="MsoNormal"><br /></p><p class="MsoNormal"><b>So what’s next?</b><o:p></o:p></p>
<p class="MsoNormal"><a href="https://greenshoeconsulting.wordpress.com/2022/04/05/navigating-business-landscape-increasingly-impacted-by-international-sanctions/">Businesses will continue to adapt</a>.<span style="mso-spacerun: yes;"> </span>This recent spate of sanctions is a test case
whether the dollar will fall as default reserve currency. However, since there
has been no difference in the economic preferences and bargaining positions of
countries with regard to global trade and investment since a decade ago, my bet
is on the US dollar to continue its reign for the foreseeable time.<o:p></o:p></p>Rogue Economisthttp://www.blogger.com/profile/03439817966760459091noreply@blogger.com0tag:blogger.com,1999:blog-6948982521501107752.post-88566639479124010202012-05-04T16:11:00.000-04:002012-05-05T09:28:36.727-04:00Why NGDP targeting?<br />
<div class="p1">
These days I keep reading about <a href="http://www.themoneyillusion.com/">NGDP targeting</a>, as it keeps being mentioned more and more everywhere. It seems to be another zombie idea taking on more life of its own. It's basically the idea that the current crisis will permanently be solved by the Fed credibly communicating to the people that it will start targeting 4-5% annual growth in nominal GDP level, from here on.</div>
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<div class="p1">
Wow. Imagine, business planners and executives will have no more compunctions about claiming to their investors that they will attain at least 5% nominal revenue growth year in year out. If they don't achieve it via additional sales volume, the Fed is going to make sure they achieve their targets via inflation. Recessions will be a thing of the past. Woohoo! There will be NGDP growth year after year, courtesy of the Fed, regardless of overall business sentiment. Nobody will ever lose again on a business investment, provided everyone invests their money in the most entrenched TBTF companies.</div>
<div class="p2">
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<div class="p1">
And business investors themselves will have no more worries about their subpar investing prowess. 5% NGDP growth means at least a positive return on their investments, no matter if they put their money in companies run by incompetent managers. If the Fed will work to ensure 5% NGDP growth every year, it wouldn't really mater if the return comes via aggregate demand growth. It can very easily be achieved by asset price appreciation. So fire away, investors. If you don't get the price appreciation via normal market forces, the Fed will come in and goose it up for you.</div>
<div class="p2">
<br /></div>
<div class="p1">
Now, how again is the Fed supposed to attain this yearly NGDP growth? Via monetary policy? Quantitative easing, Operation twist, swapping Treasuries for reserves? Hasn't this been largely ineffective in reviving demand for the last 2 years? Exactly how is confiscating government treasury assets from the private sector going to make them want to spend more money? And in keeping rates low, or causing more inflation, how is the Fed supposed to convince savers to stop saving, rather than doubling up on saving to make up for the lost yield?</div>
<div class="p2">
<br /></div>
<div class="p1">
The thing is, monetary policy has overstayed its usefulness as a countercyclical policy. You can only use it so many times to revive an economy from recession. If you don't tighten it back to previous levels, you eventually get to the zero bound, which is where we are. The Fed can't increase rates, but neither can it decrease them below zero. So monetarists have been convincing the fed to buy up other types of financial assets, to lower rates on any and all instruments that are NOT YET at the zero bound. Eventually, where does this take us? They're already proposing the Fed buy up stocks, commodities, and other financial assets.</div>
<div class="p2">
<br /></div>
<div class="p1">
See, despite all these market distorting moves the Fed has already done, <a href="http://www.nytimes.com/2012/04/29/magazine/chairman-bernanke-should-listen-to-professor-bernanke.html?pagewanted=all">economists</a> are still arguing Bernanke is not doing enough. They continue to encourage him to communicate to the market - that he will do whatever he can to induce inflation until the people do it themselves. The thing is, <a href="http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/monetary-policy-as-a-threat-strategy.html">Chuck Norris</a> may continue promising the people he will beat them up unless they do as he wants, but if Chuck has no arms and legs, people are just going to wonder how he's going to make good on his promise.</div>
<div class="p2">
<br /></div>
<div class="p1">
And if asset substitution, or buying up financial assets, or further monetary loosening still doesn't work in increasing NGDP? Perhaps the fed can just target inflation directly by regular currency depreciation. The US will then be just another currency manipulator. Will that really get people to start spending their money in the domestic economy, or will it encourage those who can to flee the currency? </div>
<div class="p2">
<br /></div>
<div class="p1">
It's the height of futility to insist that the Fed be run on autopilot, based on an automatic rule - "Do we have 5% NGDP level growth already? No, buy more assets, yes, stop, higher than 5% already, sell." The thing is, if we insist policymakers to stop thinking and analyzing the economy, and just follow these policy rules automatically, what we'll have is not a clean, well-functioning economy. We'll have instead the economic equivalent or a runaway car whose speed only varies with the slope of the road it's on. It will still go faster and slower, but it won't care who or what is in its path. </div>
<div class="p2">
<br /></div>
<div class="p1">
PS. That time again. No more posts for me till maybe later this year. Don't worry, the zombies will still be there.</div>Rogue Economisthttp://www.blogger.com/profile/03439817966760459091noreply@blogger.com10tag:blogger.com,1999:blog-6948982521501107752.post-35603586799128274512012-04-24T19:55:00.003-04:002012-04-24T22:49:12.984-04:00Why Nations Fail, a review<br />
<div class="p1">
<a href="http://www.amazon.com/Why-Nations-Fail-Origins-Prosperity/dp/0307719219/ref=sr_1_1?ie=UTF8&qid=1335311315&sr=8-1">"Why Nations Fail"</a> is different from a lot of development books. It neither focuses on specific policy proposals, and neither does it focus on specific micro or macroeconomic theories that lead lead a nation towards economic development. Quite simply, this book wants to tell you why the same specific sets of policies will work in one nation, and lead nowhere in another. It wants to tell you how you know which nations can run with a specific set of development actions, and end up achieving their objectives.</div>
<div class="p2">
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<div class="p1">
This book is also different from your regular pseudo-cultural economics books which explain away economic development in successful countries to their specific cultural, anthropological, sociological, or religious makeup. Neither does it barrage you with pseudo-explanations that attribute success to geographical location as the differentiating factor. And neither does it shirk by merely pointing out that successful countries just had the luck of having a really brilliant leader who knew what to do. Yes, these can be big factors that certainly help, but the book in fact explains how each of these common success theories fall short. After all, how many times have we seen countries located strategically next to emerging economies, and led by seemingly smart and charismatic leaders, that still fall short of economic progress, while their neighbours, with seemingly less resources, more run of the mill leaders that come and go, leap into the industrialized world?</div>
<div class="p2">
<br /></div>
<div class="p1">
No, this is a book that focus on institutions. It distinguishes between institutions that can be considered extractive from those that are more inclusive. It then explains how inclusive institutions create the right incentives for local people to invest, to strive, and to take initiative, and how extractive ones discourage them. If you've been with me on this blog for some time, you know I have a great deal of respect for institutional explanations, and how these institutions create very concrete transmission channels and mechanisms for economic policy. You can have the right policy, but it you do not have the right institutions for it, then no amount of effort will result in successful implementation. To have the right institutions, you need to know how it aligns its objectives with people's incentives and helps them overcome their constraints.</div>
<div class="p2">
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<div class="p1">
At the macroeconomic level, before you even think of specific goals and policies, you need to ask whether people can see themselves getting more prosperous if they work harder, invest their savings, and take risks with new ways of doing things. Do they see that rewards go to those who make the effort and investment, or do they risk losing the fruits of their labour to an extractive regime that expropriates and gives everything to someone else more closely connected to the ruling elite? Do they know for a fact that they will have a voice going forward, to ensure that their economic interests are protected and represented, or will they lose out to an elite that's suddenly given a monopoly on their industry?</div>
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<div class="p3">
<span class="s1">In my mind these are the questions that must run in the minds of the multitude of people who ultimately make the difference between a nation taking off and a nation not making it. <a href="http://www.interfluidity.com/v2/3212.html">Steve Waldman</a> posts that </span>depression is a revealed preference, as a polity, and we are choosing continued depression because we prefer it to the alternatives. In the same vein, nations can choose slavery, apartheid, or pluralism, rule by absolute royal decree or rule of law, upward mobility for newcomers or stable representation for incumbents, openness to creative destruction or loyalty to existing regimes. these revealed preferences often also reveal whose interests are most given importance in society. Whether these interests are those of one person, a few elites, or the greater multitude makes all the difference for a nation's rise, and it continued stay up there.</div>
<div class="p2">
<br /></div>
<div class="p1">
The book provides enough stories and anecdotes from history to make this view of development vivid. Soviet Russia, ancient Rome, Maya city states, sub-saharan Africa, medieval China and Japan, medieval England, Spain and Europe, even the neolithic age, as are a bunch of other historical places and times make it to this thick book as examples. it's like reading history all over again, but with the end of analyzing why one people or nation makes it, while others don't, and still others fall. Highly recommended for both history and economics buffs.</div>
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<div class="p1">
Written by Daron Acemoglu, MIT professor of Economics; and James Robinson, Harvard professor of Government.</div>Rogue Economisthttp://www.blogger.com/profile/03439817966760459091noreply@blogger.com3