Peace in commerce and war in currency

Pablo Heidrich, Guest Blogger

Since the last G20 meeting in Seoul to now, as we approach to the next G20 meeting in Paris later this year, one particular subject has consumed the political efforts and bargaining of its country members: what to do in response to the US monetary policy of “quantitative easing”? This policy measure is also known as printing real or fictional money until the sun sets – $600 billion this time – to buy medium and longer term US government bonds. According to its architect, the US Federal Reserve, it should help restart economic growth in the United States by lowering the mid-term cost of credit.

Beyond the technical details, printing money is an old and tested means of trying to resuscitate an economy in the midst of a serious recession, or even one risking depression and deflation. The problems of such policies are well known, too. Increasing the money in circulation eventually produces inflation and one can be trapped in a situation where the economy could get worse instead of better as investors and consumers anticipate increasing prices and costs, and refrain from making productive investments and larger purchases.

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Riding the Commodities Roller Coaster: Look, Ma, no hands!

Jayati Ghosh

Ma, why do we have futures markets?

We have them because there are all sorts of goods that people know that they will need to buy or sell in the future, say six months from now, and they want to be sure they can buy them at a certain price. Economists call this “hedging” against the risk that the price can change in a way that you may not be prepared for.

Which kinds of goods are these?

There can be futures markets in almost anything. They first started with agricultural commodities like rice and wheat, because no one could know exactly what the harvest would be like and so it helped some people to choose a price to buy or sell at in advance. Now futures markets cover not just agricultural commodities but also minerals and oil and metals, and also lots of other goods. And even some services!

So these futures markets stabilize prices?

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Financial Reform: Whatever Happened to the Stiglitz Commission?

Kevin P. Gallagher

At the onset of the financial crisis the United Nations put together an all-star group of global economists and economic policy-makers, chaired by Nobel Laureate Joseph Stiglitz, to assess the causes and consequences of the financial crisis and to make a set of recommendations to make sure such a crisis never happens again. The commission’s report was published with great fanfare and fed into a 2009 UN conference on the financial crisis that was met with little fanfare outside the UN system.  After the conference the UN focused primarily on the global climate crisis and the Copenhagen meetings in 2010.  The UN is only now beginning to pick up where it left off on global finance.  This summer the UN is to decide whether it should implement one of the Stiglitz’ Commission’s core recommendations: form a panel of experts modeled after the Inter-governmental Panel on Climate Change (IPCC). It should.

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The Dollar versus the Euro

Triple Crisis blogger Matias Vernengo published the following working paper for the Levy Economics Institute of Bard College on why the dollar is not currently threatened as the dominant international currency.

Hegemonic Currencies during the Crisis: The Dollar versus the Euro in a Cartalist Perspective

Conventional wisdom has suggested that the US dollar is on the verge of loosing its hegemonic position in international monetary markets at least since the 1960s with the seminal work of  Robert Triffin. In fact, many authors believe that the collapse of the Bretton Woods system was  the proof of the weakness of the dollar. The creation of the euro in 1999, and to a lesser extent the spectacular rise of China, consolidated the view that the dollar’s days as the key international reserve currency were numbered.

Read the full working paper at the Levy Economics Institute of Bard College.

Budget Fallacies: Why the Ryan Plan Won’t Work

Triple Crisis blogger Jeff Madrick published the following opinion article in The New York Review of Books Blog on the flawed assumptions underlying Congressman Paul Ryan’s budget proposal.

Among the economic fallacies embraced in Congressman Paul Ryan’s budget proposal, two are particularly egregious: that getting rid of Medicare will reduce health care costs and that enacting yet further tax cuts for the rich will spur growth and investment.

Critics on the left are up in arms because Ryan’s proposal to force Medicare recipients to buy private insurance will raise the amount those now under 55 will pay when they are old enough to get Medicare by an average of $6,000 a person. In other words, critics say, we are trying to cut health care costs—and supposedly reform it through more privatization—on the backs of future elderly Medicare recipients.

But the Ryan plan won’t reduce health care costs. As Peter Orszag, the former White House budget director, told me recently, the bipartisan Congressional Budget Office calculates that overall health care spending will go up as Medicare recipients are forced to buy private insurance, since private insurance has far higher administrative expenses than Medicare. Health care expenditures, as Orszag nicely puts it, are not being reduced on the backs of seniors, they are being raised on the backs of seniors.

Read the full article at The New York Review of Books Blog.

To make the IMF relevant will take more than a new leader

Triple Crisis blogger Jayati Ghosh published the following opinion article in the Guardian on the string of recent IMF failures and whether the organization’s rethink on capital controls is the start of major reform.

In appearing to veto Gordon Brown’s chances of becoming the next head of the International Monetary Fund, David Cameron says the organisation needs someone who “understands the dangers of excessive debt, excessive deficit”. But if that is all the new person understands, then he or she will make little difference to an institution badly in need of real reform.

For years the IMF has been caught wrongfooted during almost every major global economic event. Before the great recession of 2008 it was an international institution on life support: ignored by most developing countries; derided for its failure to predict most crises and then for its counterproductive responses; even called to book by its own auditors for poor management of its own funds.

The IMF encouraged financial liberalisation that pushed many countries to crisis, and became famous for congratulating bubble economies on healthy and sound financial management (Thailand in 1997; Argentina in 1999; most recently Ireland and Iceland in 2008) – often just months before their spectacular financial crashes. Its policy prescriptions were widely perceived to be rigid and unimaginative, applying a uniform approach to very different economies.

Read the full article at the Guardian.

To make the IMF relevant will take more than a new leader

Triple Crisis blogger Jayati Ghosh published the following opinion article in the Guardian on the string of recent IMF failures and whether the organization’s rethink on capital controls is the start of major reform.

In appearing to veto Gordon Brown’s chances of becoming the next head of the International Monetary Fund, David Cameron says the organisation needs someone who “understands the dangers of excessive debt, excessive deficit”. But if that is all the new person understands, then he or she will make little difference to an institution badly in need of real reform.

For years the IMF has been caught wrongfooted during almost every major global economic event. Before the great recession of 2008 it was an international institution on life support: ignored by most developing countries; derided for its failure to predict most crises and then for its counterproductive responses; even called to book by its own auditors for poor management of its own funds.

The IMF encouraged financial liberalisation that pushed many countries to crisis, and became famous for congratulating bubble economies on healthy and sound financial management (Thailand in 1997; Argentina in 1999; most recently Ireland and Iceland in 2008) – often just months before their spectacular financial crashes. Its policy prescriptions were widely perceived to be rigid and unimaginative, applying a uniform approach to very different economies.

Read the full article at the Guardian.

Damming Capital

Triple Crisis bloggers Kevin Gallagher and Stephany Griffith-Jones co-authored the following opinion article with Jose Antonio Ocampo for Project Syndicate on the IMF’s proposed guidelines for the use of capital controls in developing countries. Read more Triple Crisis commentary on capital controls and Gallagher’s latest publication on capital controls and trade and investment treaties.

Capital-account regulations have been at the center of global financial debates for two years. The reasons are clear: since the world has experienced a “multi-speed recovery,” as the International Monetary Fund puts it, slow-growth advanced countries are maintaining very low interest rates and other expansionary monetary policies, while fast-growth emerging economies are unwinding the expansionary policies that they adopted during the recession. This asymmetry has spurred huge capital flows from the former to the latter, which are likely to continue.

Emerging economies fear that this flood of capital will drive up their currencies’ exchange rates, in addition to fueling current-account deficits and asset bubbles, which past experience has taught them is a sure recipe for future crises. The problem is compounded by the fact that one of the countries undertaking expansionary policies is the United States, which has the world’s largest financial sector and issues the paramount global currency.

Small wonder, then, that several emerging economies are using capital controls to try to manage the flood. This, of course, contradicts the wisdom that the IMF and others have preached in the past – that emerging economies should free their capital accounts as part of a broader process of financial liberalization.

Read the full article at Project Syndicate.

Development Banks: Their role and importance for development

Triple Crisis blogger C.P. Chandrasekhar published the following opinion article for the International Development Economics Associates (IDEAs) Network on why several countries are doing away with development banking institutions despite the critical role development banks have played in many countries’ development trajectories.

Among the institutions whose role in the development of the less developed regions is well recognised but inadequately emphasised are the development banks. Playing multiple roles, these institutions have helped promote, nurture, support and monitor a range of activities, though their most important function has been as drivers of industrial development.

All underdeveloped countries launching on national development strategies, often in the aftermath of decolonisation, were keen on accelerating the pace of growth of productivity and  per capita GDP. This was the obvious requirement for alleviating poverty and reducing the developmental gap that separated them from the developed countries. To realise this goal, they considered industrialisation to be an important prerequisite. This stemmed from the perspective that modern economic growth was a process characterised by an increase in the
share of employment in the non-agricultural sector, and within the latter by a change in the scale of productive units, the growth of factory production and a shift from personal enterprise to the impersonal organisation of economic firms.

Read the full article at the IDEAs Network.

Tax Havens or Financial Sinkholes?

James K. Boyce

Tax havens have gotten a lot of press lately. In Britain, the UK Uncut movement has mounted demonstrations across the country against tax dodging by large corporations and wealthy individuals – making the connection between profits parked abroad and deficits and budget cuts at home.

Last month in the U.S., The New York Times revealed that GE, one of the nation’s largest companies, earned 46% of its revenue in the U.S. over the last three years but booked less than one-fifth of its profits there, shifting most of its booked profits to low-tax countries. In 2010, taking advantage of loopholes in U.S. tax laws (for which the firm had lobbied Washington lawmakers), GE paid negative taxes: despite $5.1 billion in declared pre-tax U.S. profits, the firm received a $3.2 billion tax credit. This and other blatant examples of corporate tax dodging are inspiring the birth of US Uncut, an American cousin of the British movement.

The term “tax haven” is a euphemism, however, for two reasons.

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