72 ... and going weak!

Six years ago, I blogged about the falling Indian rupee, which had reached "an all-time low of 55.03 against the dollar."

I am not an economist nor a finance person.  Common sense and critical thinking is all I have; I wrote then that "buying a dollar for 55 rupees might even sound like a good deal" because I expected it to keep falling.

Common sense and critical thinking did not prepare me for this, however:

On Monday (Sept. 10), the rupee nose-dived to a new historic low, ending at Rs72.45 to the dollar. In this calendar year alone, its value has eroded 12% against the greenback, making it one of Asia’s-worst performing currencies.

Yep, "one of Asia’s-worst performing currencies."

In that post, I compared India with one other country that has always been a grand failure--Argentina.  I wrote there, "India is not that far behind Argentina in that respect."  Here too, in the case of the slide against the dollar, Indians can comfort themselves that the rupee hasn't fallen like the Argentine peso, which has lost half its value!

In that post in 2012, I wrote:

Indians, similarly, ought to figure out how to get their monies back from the crazy politicians at every level whose personal riches have been at the expense of the regular folks who work hard. For starters, they can get vote all the bums out. The problem though is this: throwing the bums out will mean new bums will get in!

There was one comment to the post from a stranger, who ranted:

India would have been better off with ordinary people with common sense at the helm, rather than there cronies with brain-washed ideas from the west, tamely speaking in a "Phoreen" accent trying to sound more intelligent than rest.

The foreign accent was directed at the party that was in power then--Congress.  In the elections after, the "real Indians" voted for "ordinary people with common sense at the helm."  I don't know about that commenter, but to my common sense and critical thinking, 55 rupees to the dollar sounds like a much better deal for Indians than 72 rupees to a dollar ;)

As I wrote then, "throwing the bums out will mean new bums will get in!"  The new bums are well entrenched, and the modi-toadies are hard at work to re-elect them, and to also elect more such bums at the state offices. 

But then I am not a political scientist either; common sense and critical thinking is all I have.

Going down. Price of oil, that is!

A year ago, I blogged about the collapsing oil prices, in which I quoted from a Project Syndicate op-ed:

economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20. 

Apparently we are getting closer to the $20 floor-price!

AAA and GasBuddy, two organizations that follow gasoline prices, say that gasoline prices below $2 will not be unusual in most of the United States. As oil prices fall, and refinery capacity stays strong, the price of gas could reach $1 a gallon in some areas, a level last reached in 1999. As a matter of fact, the entire states of Alabama, Arkansas, Missouri, Oklahoma and South Caroline have gas prices that average at or below $1.75.

The dollar at the pump seems overly optimistic.  But, I get the point--prices will fall some more before refineries are forced to shift to a different mixture in the spring.

Source

Less than two dollars a gallon.  Oh my!  I wonder what all those left-environmentalists who complained that oil corporations were conspiring to keep the prices high are now talking about; damn, if only I hadn't pissed off the faculty colleagues, I could have asked them ;)

The eternal optimists at Reason are, rightfully, dancing with I-told-you-so moves:

In fact, it is very likely that the world is now experiencing the downward sloping side of latest commodity super-cycle. Generally speaking, as each succeeding super-cycle unfolds resource prices eventually reach levels even lower than the nadir of the previous cycle. In any case, depletionist innovation-deniers need to be publicly shamed.

And oil prices are dropping because?

Oil is priced in dollars, so a stronger dollar makes oil relatively more expensive for all consumers using currencies other than the dollar. Morgan Stanley says that while the oil glut is responsible for oil prices falling from triple digits down below $60 per barrel, the fall from $55 to around $35 largely comes from the strong performance of the U.S. dollar over the past year.

So, what should I tell students about the future price of oil?

Last fall, Goldman Sachs even suggested that the current oil price slump mirrors what happened when oil prices collapsed in the 1980s and remained low throughout the 1990s. In other words, humanity may enjoy low oil prices for perhaps another 15 years.

What?

How good are those oil price predictions?  We need to keep in mind a quote that Reason offered a year ago:

When contemplating the future of oil prices, one should always keep in mind U.S. foreign service officer James Akins’ observation, “Oil experts, economists, and government officials who have attempted in recent years to predict the future demand and the prices of oil have had only marginally better success than those who foretell the advent of earthquakes or the second coming of the Messiah.” Akins wrote that in 1973.

As Yogi Berra famously said, making predictions is difficult--especially about the future ;)

Paul Ryan's supply-side economics is a high stakes gamble

Simon Says.

Simon Johnson, that is:

Ryan and members of the Tea Party wing of the Republican Party undoubtedly want to cut the size of the federal government, and they have articulated plans to do this over several decades. But, in the near term, what they promise is primarily tax cuts: their entire practical program is front-loaded in that direction. The calculation is that this will prove politically popular (probably true) while making it easier to implement spending cuts down the road (less obvious). The vulnerability caused by higher public debt over the next few decades is simply ignored.

For example, Ryan supported George W. Bush’s spending spree. He also supports maintaining defense spending at or near its current level – resisting the cuts that were put in place under the Budget Control Act of 2011.

The assumption here – unstated and highly questionable – is that the US will be able to sell an unlimited amount of government debt at low interest rates for the foreseeable future. There is no other country in the world where fiscal conservatives would want to be associated with such a high-stakes gamble.

Or, if you prefer a picture instead of Johnson's thousand words:

Free Fallin ... the Indian Rupee exceeds the 55 speed limit!

A couple of weeks into my sabbatical stay in India, I noted in my column that India's rupee was falling against the dollar--it was big time news because the rupee was trading at worse than 54 to the dollar.  A little bit of the Reserve Bank's intervention helped stabilize the situation, but, the slide was certainly coming back if the government's policies weren't changing and India's economic outlook wasn't improving.

Well, it is almost five months since then.  Government policies at the federal and state levels continue to be crazy and chaotic.  India's economic situation isn't improving all that much, despite the fact that the world is not in any recessionary trough.

So, should we be surprised at all with this development?

The rupee, on Monday, plunged below the psychological 55-level to close at an all-time low of 55.03 against the dollar amid robust demand for the U.S. currency from banks and importers

In the bad old days of the government fixing the exchange rate, which was how it was done way back when I left India for graduate school in the US, it was, as I recall, about twelve rupees to a dollar.  Later, when India had no option but to restructure its economic policies in the early 1990s, the rupee's price was determined not by the government but by the market forces, and soon it was into the thirties and then forties, which is where it stayed for a long time.

Now, Indians better start getting used to the fifties.  In fact, buying a dollar for 55 rupees might even sound like a good deal because chances are high that it could get worse:

Analysts said rupee is likely to weaken further due to gloomy macroeconomic data and uncertainties in global economy.

"We expect it to depreciate further in the coming few months. Short-term measures by the RBI may not assist in reversing the trend," said Anis Chakravarty, senior director at Deloitte in India.

It used to be said about Argentina that if ever the government could do the worst thing at the wrong time, well, the leaders made sure they didn't waste that opportunity and, thus, for decades, the country has terribly underperformed.  In the years before WWII, Argentina was thought of as the next and Rostow felt so convinced by the data that he pronounced that the country was ready for one huge but delayed takeoff.  Instead of taking off, it has been a series of North Korean launches, it seems like!

India is not that far behind Argentina in that respect.  In the post-recessionary world, with Europe in one heck of an economic mess of its own, and with the US over-expended, one would have thought that India would have capitalized on the opportunity.  After all, unlike China, which relies way too much on foreign demand while severely restricting internal consumption, India has a robust internal demand for goods and services and can, thus, insure itself against the vagaries of foreign trade.  But, the country is so keen on going the Argentine route. 

The Hindu's editorial notes:

More effective measures should aim to check the trade and current account deficits. Unfortunately, many of the factors contributing to the widening deficits are beyond the control of the government. Oil prices are expected to remain sticky at the current high levels. The import bill is unlikely to come down in the foreseeable future. On the other side, exports have faltered after a heady run during most of last year. The rupee's fall is a symptom of a deeper economic malaise.

Yep, a very deep economic malaise, unfortunately.

All these remind me of a play that we read in high school, called "The Refund."  In that play, two former classmates run into each other and the successful one tells the loser that he became rich by trading in currencies.  The loser cannot understand how one can get rich that way.  To which the successful one replies that the loser ought to go back to their high school and ask for a full refund of the tuition he had paid over the years.  The play then gets to be quite farcical. 

Indians, similarly, ought to figure out how to get their monies back from the crazy politicians at every level whose personal riches have been at the expense of the regular folks who work hard.  For starters, they can get vote all the bums out.  The problem though is this: throwing the bums out will mean new bums will get in!

Why is India like Warren Buffett?

Who woulda thunk it, eh!

In the context of the S&P downgrade of the US' creditworthiness:

the Indian exposure is equivalent to an estimated USD 40 billion worth treasury bonds held by one single entity, Warren Buffett-led Berkshire Hathaway.

The US dollar being an international currency and a safe haven means that India, too, holds T-bills:

As one of the 15-largest foreign creditors to the U.S., India’s exposure to the United States’ ballooning debts is estimated at USD 41 billion — higher than the money America owes to countries like France and Australia.

One crazy, modern world we live in!

I suppose this is the equivalent of people saving their hard-earned money in a bank, only to realize later that there was something seriously wrong with the bank.  But, by the time they figure it out, there is no way to withdraw the money too.

Meanwhile, emergency meetings have been scheduled to prevent any nasty contagion from the combined US/Euro issues.

On the other side of the issue, turns out that S&P itself has erred in its computations?

The reality seems to be that S&P made a very embarrassing error in the numbers that it initially sent to the Treasury – one that could have made a substantive difference to its downgrade decision.
The administration’s counterattack, however, is a convenient distraction from the harsh criticism of the political process that was at the heart of S&P’s decision.
The initial numbers that S&P sent to the Treasury at 1.45pm on Friday were based on the “Alternative Fiscal Scenario” prepared by the Congressional Budget Office. That assumes that discretionary federal spending will grow in line with the economy. S&P then subtracted the roughly $900bn in savings created by the debt ceiling deal to estimate net debt.
However, the CBO had calculated the $900bn savings from a different baseline, which assumed that spending would grow in line with inflation. Calculated from the higher alternative scenario, the budget savings would be closer to $3,000bn. Adjusting for this would mean that net public debt only rose to 79 per cent of gross domestic product in 2015 instead of the 81 per cent in S&P’s initial estimate.

Sure enough, Paul Krugman has written about this:

The point here is not so much the $2 trillion, which makes very little difference to real US fiscal prospects; it’s the fact that S&P stands revealed as not understanding basic analysis of budget estimates.

Rajiv Sethi says we simply ought to say F*&% You to the credit agencies (ht):

Perhaps the time has come to consider a complete overhaul of this dysfunctional system. Withdraw the special designation accorded to the major agencies, so that they compete on a level playing field with new entrants. If they really do have the expertise to make assessments of credit risk that are more accurate than the market, let them build reputation and find clients willing to pay for their pronouncements. Make capital requirements for financial institutions independent of ratings, thus stripping the agencies of their monopoly power and guaranteed sources of income. And in the meantime, greet their pronouncements on sovereign debt not with an anxious wringing of hands, but with a collective yawn.

Funny, though, that the F-you arguments were far from this loud here in the US when the credit agencies went around downgrading sovereign governments elsewhere, and even though those governments were complaining about S&P and the like :)

All these remind me of the old quote attributed to Casey Stengel: "Can't anybody here play this game?"


Seriously, were things always like this?  What a fine mess!

Dawning of a new day in an old world of Quito

“Are you going to a garage sale?” asked the teller at the local bank when I asked her to provide the money that I was withdrawing in ones, fives, and tens.  “It looks like there are a whole lot of garage sales this week” she added.

“No, I want smaller bills because I am traveling” I replied.  For some reason I didn’t want to volunteer any additional information on my plans.

But, the teller was curious, I guess.  “Where you going?”

“To South America. To Ecuador.” 

“Oh, in that case you want me to give you newer bills?  Because in foreign countries they don’t like bills if there is any small tear, right?”

By now I decided that there was no point holding back with the young woman, who, for some reason, reminded me of my daughter, and was genuinely interested in the satisfaction of this customer.  “No, that won’t be a problem at all. Ecuador uses American dollars.  They don’t have their own currency.”

She got visibly excited with this piece of information that was entirely new to her.  “Really?”

I thought about my student, "R," commenting that travel is easier when there is no need for funny money, and we can simply use the dollar bills instead.

“Yes, there are a couple of countries that operate this way.  Which is why I want the smaller bills while down there, which I can then use for expenses like food and taxi.”

“Wow. Something new every day.”

Transaction ended and she wished me bon voyage.  I had to check myself from automatically saying "you too."

The next day, I was off to Quito.

I didn’t have any plans on how I was going to spend the six days in Ecuador.  Of late, this has become my approach to traveling.  I did the homework though by reading the Lonely Planet guide and a bunch of websites, and had in the back of my mind the key things that I would watch out for once there.  But, the plans will be worked out after landing in Ecuador.  

All I had was a hotel reservation in Quito.  Everything else was to be ad hoc.

I didn’t even have to worry about the transportation from the airport to the hotel—I had pre-arranged for a ride, through the hotel. The confirmation email from the hotel noted:

Our representative, Trans Rabbit, will meet you at the airport the day of your arrival, when flight of AMERICAN AIRLINES 967 reaches Mariscal Sucre airport at 22h00.   It will be very easy to find him as he will hold a blue sign with your name (Mr. Khe) on it.

He held a black-and-white sign, not in blue.

It was past eleven in the night when I got into the room.  A spacious room with an old model television set that distorted the colors at its edges, and with quite a large sized bathroom.

A little after 6:30 the following morning I stepped out of the hotel for a quick stroll before breakfast.  I had barely walked a few steps when I realized how close the hotel was to one of the main plazas in the historic old town area—Plaza Santo Domingo.  I knew this from the homework readings, but still was quite a revelation.  A simple example of the textbook knowledge versus experiencing things firsthand.

My excitement levels quickly shot up when I turned the corner and caught a glimpse of the statue of the Virgin, up on a hill.  I walked a few more blocks until I got a good view of the statue.  I knew I was no longer in the good ol' US of A.   “Maybe I made the right call, after all” I told myself.

It was not even seven in the morning, and there was not much of any activity.  Furthermore, it was a Sunday morning, which was another reason for people not to hurry up.   

After circling a few more blocks, I walked up to the top floor of the hotel for breakfast.  I carefully separated out the ham from the scrambled eggs--I am yet to develop a taste for most animal products--and hoped that the refreshing guava juice would calm down my anxieties about visiting alone a new place with a foreign tongue as well.

And thus began my first day in Ecuador.

Ben Bernanke caused the Arab "cereal" revolutions?

Yes, our Federal Reserve's Bernanke.  No, he doesn't command over a military, and no he doesn't really print money.  So, what is the link you ask?

Step back for a second.  Back in October, I blogged about the aggressive approach that Uncle Ben was taking, and quoted Martin Wolf of the Financial Times, who explained how the global "economic" war was being fought:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

I liked his phrasing of "no limit to the dollars the Federal Reserve can create" for the powerful simplicity.  Inflation in the rest of the world--particularly in all those countries like India and China and the rest where economies were growing.  Inflation then would show up in various commodity prices, and food in particular.

And, boy, did food price inflation happen!  For instance, India's coalition government was all shook up when onion prices zoomed faster and higher than the rockets its space agency launched. More from Derek Thompson:

Dramatic inflation in corn, wheat and other agricultural products is feeding discontent throughout the Middle East, where families spend up to 40% of their income on food. When you glance at how the average Egyptian spends his money, you understand why food inflation can traumatize a country.

But what the heck does U.S. monetary policy have do with the price of wheat in Egypt? Remember that Bernanke's policy of "quantitative easing" aimed to stimulate the U.S. economy by printing trillions of dollars to encourage lending and spending. Easy money seems to have driven up equity prices (look at the stock market), but it might also have encouraged banks to plow their liquid cash into commodities -- like petroleum, copper, and wheat.

Of course, Bernanke doesn't think so.  He has been making the rounds defending his policies and offering  counterarguments to his critics.  I am thinking, hey, take a bow--you have done the world a huge favor by ridding a few dictators already, and it appears that quite a few more will follow suit.

Bravo, Ben Bernanke!  You did with paper what the mighty American military could not have ever achieved ...

Graph of the day: currency wars and competitiveness

Was it a month ago that I quoted Martin Wolf, who wrote in the Financial Times that:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

In the graph below, the impacts even before the latest US Fed/Bernanke strategy which has pretty much the entire world up in arms

Strong dollar?  Ha!

Currency wars reach the Indian shores

A few days ago, I quoted Martin Wolf, who wrote in the Financial Times that:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

And ...?  Here is the NY Times:

The Indian rupee is soaring — up 9 percent against the dollar in the last 16 months. That has taken a toll on exports like textiles by making them more expensive on the world market. And the strong rupee poses longer-term threats of overheating the economy.

So, one would expect India to take appropriate action?  Not yet ...

instead of fighting currency appreciation, as Brazil and some other countries have done, India has been willing to let the rupee rise — for now, at least.
India is simply too hungry for the foreign capital that is drawn to the strong rupee and is driving it higher, because that influx of money is helping support this country’s approach to developing a modern consumer economy.

Makes sense,right?  A developing country will need capital for all kinds of investments, and if foreigners are eager to send their money across, hey, grab that:

The influx of capital has helped fuel a nearly 9 percent annual growth rate for India’s economy. It has also powered the Indian stock market to near record highs. A big beneficiary of the stock rally has been the government, which is selling shares in state-owned firms like Coal India, the world’s largest coal miner.
The government, which has a large budget deficit, plans to raise $9 billion in the current fiscal year from share sales and spend the money on jobs for the rural poor and other welfare programs. A stronger rupee also reduces India’s bill for commodities, like oil, that it needs to import.

Imagine if China too allows its currency to appreciate ...

Free Falling: the US Dollar :(

Protectionism and currency battles

Somehow, I cannot imagine Christine "I am not a witch" O'Donnell casting a meaningful Senate vote on bills that address anything remotely related to the following discussions :)
(editor: why pick on O'Donnell?  You think Al Franken can? Awshutup!)

My increasingly favorite economist Raghuram Rajan is interviewed by Der Spiegel:

SPIEGEL: China and India are advancing to become the engines of the world economy, whereas the economies in the old industrialized world have become sluggish. What is the future role of economies like those of the US, France or Germany?
Rajan: The traditional industrial countries have to be prepared for the fact that they will lose their natural advantages. Let me give you an example: When you're working for a fashion company in Milan, you just have to look outside your window to be inspired. But the new customers live far away -- in Shanghai, for example. That's where the demand is and where the designs will soon have to be created. Things will not be as easy in Milan as they once were.
SPIEGEL: So you're saying that Western companies will not only be moving parts of their production abroad, but also services?
Rajan: The central question is this: How can industrial companies serve the demand that is developed thousands of miles away? This is the great challenge for the coming years. I suspect that in such an environment protectionist impulses will get stronger.

Over at Financial Times, Martin Wolf explains how the global economic wars are being fought:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

Hey, Professor Bernanke, rev up those dollar bill machines :) 

Wolf adds:

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from abroad into emerging economies of more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital, albeit at a falling rate (see chart).
Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

WTF is all I can think now!

The free (freely?) falling American dollar

It was a gathering that was fascinating in one way: it was international.  Two American citizens, two Canadian citizens, two non-citizens but (legal, of course) immigrants from India, and one visiting Indian Indian citizen.
Well, international as it was, it was also a gathering of people of Indian stock :)

During the casual conversation that included a whole lot of laughing and general merriment, we noted that the American dollar is not all that mighty when we travel in India.  "A plate of idli costs fifty rupees" said one--about a dollar.  As poor as India is, it appears that the US dollar has become considerably poorer over the years.  In the middle of all this, my brother called from Australia and is excited about news from down under that by 2012 the Australian dollar might fetch up to 1.2 US dollars.

What the heck is going on, eh!  I thought that the official US policy has always been in favor of a strong dollar, but it has been far from that.  Nothing seems to be working!

The debate over currency valuation is pivotal. World leaders broadly agree that for the global economy to be more stable, imbalances between creditor countries like China and Germany and debtor countries like the United States and Britain have to be fixed. 

Hey, tell us something new that we haven't experienced!

the United States has lost some of the standing it needs to shape global policy. Not only is Wall Street viewed by many as having initiated the world financial crisis, but also, a number of countries fear that policies by the Federal Reserve are pushing down the dollar’s value — the same kind of currency weakening for which the Obama administration has criticized China.

“Other countries are no longer willing to buy into the idea that the U.S. knows best on economic policy, while at the same time the emerging markets have become increasingly influential and independent,” said Kenneth S. Rogoff of Harvard, a former chief economist at the I.M.F.

Great.  Thanks!  If we trace back the currency issues from the Breton Woods agreements,

Back in 1944, the Americans did not envisage that they would one day be the world's biggest debtor nation. For years they have been able to stave off the consequences of running a large trade deficit by printing more dollars. That's something you can get away with if you are the world's premier reserve currency, but at a price. The imbalances grew bigger and bigger until they threatened the stability of the world economy.

The Americans are now able to see the downside of the system they themselves created: what do you do when a creditor nation tells you to push off, as the Chinese have done in the past week after pressure from Washington to revalue the yuan? The answer, as Tim Geithner, the US treasury secretary, has discovered, is that you plead and you cajole and you threaten, but you have little traction unless you are prepared to "go nuclear" and impose trade barriers.

So?  What might happen then?

the Americans are probably closer to pushing the nuclear button than they were before the weekend. The jobs figures highlighted the fragility of the economy, while the IMF meeting highlighted the impotence of the multilateral system. If, as seems apparent, the world can only pull together in a crisis, America and China between them may be about to provide one.

That means that after all the distractions of 9/11, Afghanistan, Iraq, etc., the US and China once again become serious adversaries, like how they were in April 2001?

A symbol makes a currency? Nah!

This is the symbol for the Indian Rupee--has been adopted by the Indian government, and will now work its way through various international bodies for acceptance and implementation worldwide.

The more important question is whether the Indian rupee will be accepted at, say, Tokyo's Narita Airport.  It is one thing to design a new symbol, it is another for the currency to be accepted outside India.  That will take a long time.

One commentator notes:

Looks a little like Harry Potter's lightning scar, doesn't it? Either that or the logo for a new import sports car. Or maybe even a windblown pine tree in a Tom Thomson painting.

Over at the WSJ is this observation:

The new symbol contains the Devanagari ‘Ra’ and the Roman capital ‘R’ without its upright leg. It’s hard to describe. It also looks like backward “c” suspended on a backslash with some railway tracks running through it. That help?

So, what does the Gray Lady has to add to this?

It was designed by D. Udaya Kumar, a student at the Indian Institute of Technology, who studied typography, scripts and ancient printing methods.

Where do some of the other currency symbols that we use often come from anyway? The American $?

When the United States adopted its own currency in 1785, it used Spanish money as its model—a deliberate "screw you" to the British. Scholars have since theorized that the $ sign evolved out of an abbreviation for peso: The plural for pesos was "p^s," which eventually became "ps," and then simply an "S" with a single stroke denoting the "p." One early instance of the $ symbol crops up in a letter written by the merchant Oliver Pollock in 1778. Pollock also uses the "ps" abbreviation, making the letter a bridge between the two. The double-line through the S variation is less easily explained. Some believe they represent the twin pillars of Gibraltar depicted on the Spanish coat of arms. Others say it's shorthand for the letter "U" superimposed over the letter "S"—for U.S.

Now you know!

The US economy in a mess, but dollar surges ...

A long time ago, our high school English included a play called "The Refund" ... at least, I think that is what the title was (I am simply excited I can remember this much given that 30 years have passed since I exited the best high school I could have had.)  In that play, a character runs into his schoolmate who says he made a lot of money trading in currencies, and this oaf has no idea what is going on.  The successful guy then tells him that if he does not know even that, then he ought to go back to high school and get his tuition and fees refunded!  (Hey, anybody reading this, any chance that I might locate this play on the Web?)

I sympathize with that dolt in the play who could not understand how people can make money from currencies.  I mean, look at this: the American economy has been awful for quite some time now.  The stock-market wants to sink down to where the BP well is spewing like an undersea volcano.  Unemployment continues to be way too high.  The wars in Iraq and Afghanistan suck money, life, and any sense of hope. 

And, guess what?  The dollar is appreciating.  Money is rushing into America.  Bernanke, et al, have no pressure to raise interest rates.  It is almost like we have entered a bizarro world!

It just so happens that the US might suck, but the rest of the world seem to be suckier.  I tell you, am ready for my refund :)

Economic recovery depends on "gas now, brake later"?

The first time I came across the phrase was in this piece in the Economist:

Mr Obama’s fiscal policy has been described as “gas now, brake later”: wider deficits in the near term to keep the economy out of depression (which would risk even bigger deficits), followed by a switch to deficit reduction to cap the rise in the national debt. The switch, however, remains a future abstraction.

So, who actually coined that phrase anyway?  (I'll admit that it is too darn "cute" a metaphor.  So, it can't be Thomas Friedman ... muahahaha)
A Google search for "gas now, brake later" points only to the Economist as a source for it.  So, ahem, the Economist making things up but does not want to claim ownership and wants to pretend that it is something like a well-accepted descriptor of the current administration's economic policies?  Hey, whatsup?

Anyway, where will this sticky gas pedal metaphor take the US?

Fortunately, America has time. Its favourable demographic trends mean its fiscal day of reckoning is further off than Europe’s and the dollar’s reserve-currency status provides manoeuvring room. Yet this may not be the blessing it seems. Getting politicians to take the deficit seriously may well be impossible unless the bond market forces them. For now Europe’s crisis has done exactly the opposite: as investors flee the euro, the dollar has soared and Treasury yields have plunged. There is not much incentive to take the foot off the gas-pedal and apply the brakes just yet.

Great!

The dollar, Renminbi, Geithner, and India

Yes, those four belong in the same context because the US Treasury Secretary is in India, even as the world is getting more and more interested in the tensions over the US' concerns that China is holding its currency down at an artificially lower exchange rate.

First, these tidbits about Geithner and Obama:

During the early 1980s, Geithner's father Peter Geithner oversaw Ford Foundation's microfinance programs in Indonesia developed by Ann Dunham Soetoro, President Barack Obama's mother. Prior to that, Geithner Sr headed the Ford Foundation operations in India, which led to a toddler Tim spending his early years in New Delhi, where he had a crack at cricket but remained true to baseball.

So, tidbits aside, what is the Secretary thinking about these days with the China report due in less than a fortnight?

Geithner suggests, it is the level of comfort US has with India's transparency and fairness, compared with China, with whom Washington has been on the verge of an ugly spat over currency exchange rate manipulation. "The differences are mostly defined by the differences in our economies," Geithner said cautiously, reluctant to be drawn into a discussion on China. "We're not going to be talking in India about the exchange rate regime." India, he says, is "becoming more open, runs a flexible exchange rate regime. Its basic pattern in growth has been less export dependent, oriented over time. Different economy, different structure, different choices."

But, wait, the report on whether China is a currency manipulator is now delayed--it will not come out on the 15th after all ....
Meanwhile, according to the Financial Times:

In its latest estimate, the World Bank has predicted a growth rate of 9.5 per cent for 2010, but many analysts predict even faster expansion of the Chinese economy this year.
Growth in the first quarter alone is estimated at between 11 and 12 per cent.
...
But China’s trading partners, particularly the US, fear that its policy of holding down its exchange rate relative to the dollar is driving overseas demand for its exports which, in turn, is fuelling rapid economic expansion and inflation.

The Economist says that even if the April report does not cite China as a currency manipulator, then it will be only to give China one last chance:

The administration’s best hope is that China moves of its own accord before events in Congress or elsewhere force a confrontation. Tim Geithner, the treasury secretary, is surprisingly confident that China will act. Sander Levin, the usually interventionist-minded chairman of the House Ways and Means Committee which oversees trade matters, advocates multilateral rather than unilateral pressure. So perhaps the administration will give China one last chance and seek a multilateral remedy at the G20 in June. If China still fails to respond, the Treasury, by the time of its autumn report, will no longer be able to deny the obvious.

I tell you, we live in interesting times :)

Greece: the crisis musical :)

A pictorial statement, worth more than a thousand words, on the Greece/EU/Euro issues :)

Even Dutch cartoonists joke about the Dollar :(

Bad news for Euro ... good news for the dollar?

If only the state of a "permanent revolution" here in the US would calm down just a tad .... because, there is a global opportunity that we can tap into: the Euro is heading into a big fall and, yet again, the dollar and the US will be viewed as one hell of a safe investment amidst the chaos of the world.  First, from the WSJ:

The euro is likely to face further declines this week as concern over sovereign debt in Europe prompts investors to seek refuge in the perceived safety of the dollar and the yen.
Pressure on the common currency escalated last week, as worries about the soundness of debt issued by Greece spread to other fiscally stressed euro-zone nations, including Portugal and Spain.

Second, a little more on the sovereign debt, from The Economist:

As you can clearly see at right, Europe's deficit troubles began well before the global economic collapse.Now, there was an interesting discussion in the Washington office this week over whether it was possible for there to be a simultaneous crisis for all sovereign debt. While perhaps technically possible, it does seem unlikely, and so one might argue that countries with a relatively sound fiscal position, like America, have a lot of room to borrow for now, because debt worries elsewhere are causing investors to look for relatively safe havens. 

Ok, back to the WSJ:

The euro's losses were about 1.5% against the dollar last week, bringing its year-to-date slide to 4.6%. Against the yen, the common currency dropped Friday to a near 12-month low.
"Until we see signs of acceptance by those [nations] that austerity measures need to be put in place to resolve the fiscal imbalances, the euro will continue to deteriorate," said Thanos Papasavvas, head of currency management at Investec Asset Management in London, which oversees about $60 billion.
Ballooning budget deficits in euro-zone countries threaten to hurt an economic recovery, forcing the ECB to keep interest rates low longer than anticipated, in contrast to expectations of quicker increases from the U.S. Federal Reserve.

So, can the G7 do anything?  What says you, Professor Simon Johnson?

Ex-IMF chief economist Simon Johnson, also described the G7 group of leading economies as "fundamentally useless".

Johnson does not hold anything back:

Greece is an an extreme example - there I think you can see that it's going to get very messy very quickly - but unfortunately the budget situation in these other countries is also weak.
"And I have to add the UK to this list. Unless you can persuade the markets that you're really going to bring the budget under control within the foreseeable future and you're going to have some credible actions - and you're going to have to do some persuading - you're going to have big trouble."

But, Paul Krugman has a different take and, get this, it has an abbreviation that "sounds" great when you say it aloud as a word: PIIGS :) .... Krugman writes:

As Europe is roiled by sovereign debt fears, it’s important to realize that the crisis in the largest of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) has nothing to do with fiscal irresponsibility. ....
The point is that this has nothing to do with a spendthrift government; what’s happening to Spain reflects the inherent problems with the euro, which now more than ever looks like a monetary union too far.

 Krugman then has this update:

Update: Whoops. Yes, Italy is bigger than Spain — and it has been fiscally irresponsible. But in a way that makes the point; Spain, which has been a good actor, is in much more trouble than Italy, which hasn’t

All the economists of the world will duke this out.  As far as I am concerned, once again the US dollar becomes a safe haven--despite the humongous mess that we are in.  How bizarre, eh!

What a depressing news headline :(

Huge Deficits May Alter U.S. Politics and Global Power

That is the headline over at the NY Times.

My question is this: why the use of "may" and not "will", eh?

American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.
For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.

Again, where from does the NY Times get an optimism to use "may" instead of "will", you ask?  Well, it is at the tail end:

“Much may depend on whether we put in place the financial reforms that can rebuild a functional financial system,” Mr. Galbraith said, to finance growth in the private sector — the kind of growth that ultimately saved Mr. Clinton from his own deficit projections.
His greatest hope, Mr. Galbraith said, was Stein’s law, named for Herbert Stein, chairman of the Council of Economic Advisers under Presidents Richard M. Nixon and Gerald R. Ford.
Stein’s law has been recited in many different versions. But all have a common theme: If a trend cannot continue, it will stop.

I suppose we can expect the dollar to continue to slide down.  Meanwhile, the demographic dynamics of the Euro zone and Japan mean that those economies will slowly lose their influence and so will their currencies.  The Russian demographics are no different.  So, it will all come down to a showdown between China and the US.

And, it does not appear that the Chinese politburo is as stupid as the Soviets were.  Which means chances are pretty good that China will stare us down?  Hmmmm.....

Perhaps I should return to using the line I discontinued, when talking with students: "you are screwed!"