Friday, January 28, 2005

Vehicle Currency Use in International Trade

Vehicle Currency Use in International Trade. The paper suggests that industries with high demand elasticity are more likely to display hurding in their use of a particular invoicing currency. Are these the industries that will switch from invoicing in USD to EUR?

A more general overview of the literature A theory of currency denomination of international trade. (pdf)

Thursday, January 27, 2005

USD reserve diversification

Nouriel Roubini :

"Suppose that a number of small BW2 periphery countries diversify out of US dollars into yen and euros and that leads to a weaker $ relative to Euro and yen. Then, the BOJ may start intervening again and the ECB may start to intervene altogether to avoid excessive appreciation. Then, the BW2 periphery would free ride on the ECB and BOJ: they would be able to dump their undesired $ assets and acquite Euros and Yen provided by the BOJ and ECB intervention at no cost to these free riders as the $ cross rate relative to euro and yen would be unaffected if such intervention occurs and at not cost in terms of bilateral currency value relative to the US $ as someone is absorbing the undesired hot potato of dollar assets. This way ECB and BOJ get the hot potatos of $ assets that small countries do not want and give Euros and Yens to the free riders in exchange."

Also US and China "Balance of Financial Terror Prisoners' Dilemma Game.

Discussion of Chinese move to a basket peg.

Reuters Indifferent 2 year-note auction.

Sunday, January 23, 2005

Valentines day more expensive?

The BBC report that Interflora, the UK mutual for delivering flowers, has agreed to a buy out by 3i. Story. Will prices now rise? A recent study suggests that privatisation does encourage firms to concentrate on profit-maximisation.

The effect of UK building society conversion on pricing behaviour

This paper says that UK building societies (similar to a cross between S&Ls and credit unions) acted to boost profits after they were privatised. This was one of the many arguments against privatistion at the time. The Nationwide, which refrained from privatisation and maintains its mutual status, has tried to emphasise the fact that its borrowing rates are lower and deposit rates are higher than the regular banks. It also emphasises the fact that benefits accrue to members.

Thursday, January 20, 2005

Demographics are Destiny

The Dead Parrot Society: Demographics are Destiny:

"I knew things were bad elsewhere, but I didn't realize just how bad. Europe is projected to have an 18% population decline over the next 45 years. By 2050,30% of the Chinese population will be over 65. Over that same time period,Japan's worker to retiree ratio is projected to be -- get this -- 0.3. That is not a typo. There will be three retirees for every worker. This is caused in part by very low fertility rates (estimated to be 1.32 for the past 5 years; this contrasts with our recent estimated rate of 2.11). Japan's problems are also exacerbated by a total lack of immigration: our new immigration is almost as large on a yearly basis as is Japan's entire population of foreign nationals."

Lots of interesting information about demographics and good links to the information sources.

Here (pdf) is a simple outline by James M. Poterba of some of the issues related to demographic change,asset accumulation and prices

Tuesday, January 18, 2005

CO2 trading

European CO2 markets are becoming more liquid. The Economist provides an overview.

FT on COs derivative: "Trading of allowances for carbon dioxide emissions in Europe took a step forward on Monday with the first derivatives contract to be cash settled."

Friday, January 14, 2005

Money, assets and central banks

PIMCO Bonds - FF Jan 05

Lovely analogy of the argument in favour of micro rather than macro solutions from the Fed.

"Or to return to an analogy I used last summer, if Mr. Greenspan were a bartender with one rowdy drunk:

He would double the price of beer for all, in an effort to bankrupt the drunk more quickly, rather than simply cut off the drunk, letting the decent folk continue
to act decently at an unchanged price.

I firmly believe that the welfare-maximizing policy for society would be to cut off the drunk. But I don’t run America’s monetary policy. Mr. Greenspan is the monopolist bartender, not me. Accordingly, if he wants to endeavor (one of his favorite words!) to engender uncertainty, otherwise known as fear, in the minds, hearts and wallets of those engaged in “excessive risk taking,” all of us, not just those engaged in excessive risk taking, should get a firm grip on our wallets.

Or, to return to my analogy, we should take a walk ‘round the block, until the rowdy drunk falls off his stool.

I would add - walk round the block, because the drunk will be pretty soon looking to borrow money to maintain the drinking. It's going to get ugly.

Thursday, January 13, 2005

Why are English-speaking nations doing best?

Comments from Martin Woolf at the FT (subscription required) about the recent outperformance of English-speaking countries.

Why are English-speaking nations doing best?

Arnold Kling on James C. Bennet's The Anglosphere Challenge.


Argentina and the IMF - should creditors accept the Argentine terms, should the IMF charge market rates?

Brad Setser's Web Log: Should the IMF ever take a haircut?

Similar lines from Roubini

and Reuters article Argentina pushes debt swap

Speculation and volatility

Talks about hedge funds and Uranium. Here is the old dispute about speculation and volatility.

Monday, January 10, 2005


The McKinsey Quarterly: Beyond cheap labor: Lessons for developing economies

Excellent McKinsey article about the pressure China is putting on Mexico and some comparisons of various industries struggling to move up the value-chain.

Sunday, January 09, 2005

Chinese citizens now prefer renminbi to dollars ...

Brad Setser's Web Log: So private Chinese citizens now prefer renminbi to dollars ...

This is a comment about the apparent preference in China for local currency rather than the USD. Given the speculation about a renminbi revaluation, this should not be a total surprise. There are some anecdotal reports in addition to the data from the Peoples' Bank of China.

I believe that most of the research on the Asian crisis suggests that domestic players were the most swift and most sucessful in moving money out of the country (or at lease into other currencies). There is no reason to believe that it would not work the other way round. All the talk is when not if the Chinese authorities will revalue the renminbi.

Thursday, January 06, 2005

Joel on Software - Camels and Rubber Duckies

Joel on Software - Camels and Rubber Duckies

This is an excellent article. Pricing, the consumer surplus and market segmentation. All written in a very funny style.

Asian central banks and the yield curve

Brad Setser's Web Log: Unraveling the mysteries of the Treasury yield curve

Top comment on the central bank buying of US debt - lots of data sources and information on fx market from the BIS.

It seems intuitively obvious that, without the intervention from Asian central bank FX internvetion (parked in US treasuries), interest rates would be higher in the US. Brad Setser does the groundwork with the figures for bond purchases etc. The solution to increasing net external debt of the US is to reduce the curent account deficit through higher prices and lower relative growth. The Asian central banks are preventing these things from taking place.

More information here from Brad on international capital flows and US deficit financing

Wednesday, January 05, 2005

Brad DeLong's: Equity Returns in the Future

Equity Returns in the Future

This is a detailed discussion about the prospect for equity returns in coming years. This links in with a second post by Brad about equity returns.

Equity Returns in the Future II: "Well, the upshot is that the 3-4% annual expected equity premium return that I see still seems very large to me: to correspond to the preferences of a 62-year-old male expecting to spend his wealth in the next fifteen years or to the preferences of a money manager for whom reporting a big loss in the next four years is a career-limiting move, rather than to the risk preferences of the economy considered as a frictionless social welfare maximizing machine. And this means that there is still a powerful, powerful case for stocks for patient investors with a long horizon of a quarter century or more. If you can wait a quarter century, stocks do not look like a sure thing relative to Treasury bonds, but they do look like a 90% thing."


This is a very highbrow comment on probability theory with a lot of links in the comment section about the more theoretical ideas backing probability theory.

Tuesday, January 04, 2005

The Social Seurity Debate Continues

Here are some links to the debate over social security, the projections and the whole issue of changing from wage indexation to price indexation.

Marginal Revolution
Vox Baby
Nouriel Roubini
Brad DeLong

Have fun!

Options and market efficiency


Comment on Nassim Taleb and the idea that long tails suggest super-normal profits from options.

Investing money | Investing money

Very interesting article about the return on certain assets over the last 20 years. The Economist makes the point that the last 20 years may have been an exception. They also point to the relatively high P/E rating that US stocks currently enjoy.

Monday, January 03, 2005

Fears over new 'fair value' accounts

Guardian: Fears over new 'fair value' accounts:

Talking about new accounting rules that will "Huffing and puffing, though, is part of the game because IFRS is, in the view of accounting firm Ernst & Young, 'the biggest change in financial reporting in a generation'. Opportunistic hedge funds are known to be taking a keen interest, knowing that investors' instinct on seeing unexpectedly poor numbers will be to sell first and ask questions later. "

This suggests that any uncertainty about the economic reality behind accounts causes distortions to the market. It does not appear likely to me. Isn't this what equity analysts are supposed to do - sort the financial wheat from the chaft and find the underlying picture of the firm beneath the announting surface? Individual investors are not likely to be able to complete this task, but the current price should reflect the professional information. This professional information is not likely to be distracted by new accounting rules.

Global textile market opens

China is expected to benefit from opening of world textile market IHT. The article includes comments from African nations complaining about the labour conditions in India and China.

Reuters: "'If you look at a study done by the WTO in September, it shows that India and China will grab about 80 percent of the world market and the remaining 20 percent will have to be shared by the rest of world,' said Narainduth Boodhoo, duty director of Mauritius's Trade Policy Unit."

More detail on the changes from the LA Times here? with lots of information about current exports and imports. Also the Economist reports here.

I would have thought that Africa would have a comparative advantage here, but these stories highlight the disadvantages that many of the least developed countries face.

Brad Setser's Web Log: Bretton Woods Two Lives

Brad Setser's Web Log: Bretton Woods Two Lives: "Europe complains that it alone bears the burden of currency adjustment v. the dollar. Emerging Asian central banks could just as well complain that they alone are stuck with the burden of financing the United States."

They are not really stuck with it (apart from the institutional sense). When they decide to allow more flexibility in their currencies they will purchase less USD assets. This will also be the point when the adjustment of the US current account deficit starts to take place: US imports from Asia(making the vast bulk of the US defict) will become more expensive and US long term interest rates will rise. This is more likely to 'correct' the deficit than continued gains in EUR-USD.