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On the currency carousel

Thu, 07 Oct 2010

Fears of a new world currencies war have created a global tension that looks unlikely to subside any time soon.

Part of it has been sparked by a bill before the US Congress that aims to impose punitive tariffs on countries that undervalue their currencies – primarily China.

Speakers from both sides of the political fence in the US spoke aggressively in support of the need for tough action against currency manipulators that foil the principles of free trade.

The bill was passed overwhelmingly – by 349 to 79 – and sparked some strong reactions ahead of the Asia-Europe summit, at which the Europeans threw in their euros’ worth as well, and the finance ministers meetings in Washington.

No one comes clean out of this. China’s low-yuan policies are well known – Prime Minister Wen Jiaboa says a rapid rise would hobble its economy – and the huge foreign reserves are also bolstering the yen, despite efforts by the Bank of Japan to keep it down.

The Swiss have the same problem, as their currency has safe haven status. The franc is now worth more than the greenback despite sporadic interventions.

Brazil has doubled a tax on foreign investors to curb a rush into its booming economy, while Korea has also taken steps to hold its currency.

The US dollar and the euro are still in a downward trend, mainly through inflationary money-printing programmes, but this has helped boost exporters from those zones.

New Zealand, Australia and Canada are among the losers, as these currencies appreciate whenever the appetite for risk rises, usually on some sign of a global recovery.

Add to that, oil goes up when the US dollar dives, as does gold, which is at another record high this week.

If you want to make more sense of this, The Economist’s Buttonwood column and this Bloomberg roundup are a good place to start.

Nobel predictions
By far the biggest prize for economists is a Nobel Prize, technically the Swedish central bank’s prize in economic sciences in memory of Alfred Nobel.

Each year, the contest is keenly awaited (check out the latest rankings at iPredict). Financial services and news agency Thomson Reuters thoughtfully runs a list of the top fancies. In most years, the same names come up – until, of course, they win.

Thomson Reuters picked last year’s co-winner Oliver Williamson in 2006 and 2008’s Paul Krugman (also in 2006). This year, the four picks are:

Alberto Alesina (Harvard) for theoretical and empirical studies on the relationship between politics and macroeconomics, and specifically for research on politico-economic cycle;

Nobuhiro Kiyotaki (Princeton) and John H Moore (Edinburgh/London) for formulation of the Kiyotaki-Moore model, which describes how small shocks to an economy may lead to a cycle of lower output resulting from a decline in collateral values that creates a restrictive credit environment; and

Kevin M Murphy (Chicago/Stanford) for pioneering empirical research in social economics, including wage inequality and labour demand, unemployment, addiction and the economic return of investment in medical research, among other topics.

Economics blogger Amol Agrawal thinks Alesina won’t make it but says the Kiyotaki-Moore model is in much demand after the global financial crisis. He also describes Murphy as a great mind who has linked economics with many different fields.

Earlier picks by Thomson Reuters who have yet to win are:
•2002-05: Robert Barro; Eugene Fama and Kenneth French; Paul Michael Romer; Richard H. Thaler
•2006: Jagdish Bhagwati and Avinash Dixit; Dale Jorgenson; Oliver Hart and Bengt Holmstrom
•2007: Elhanan Helpman and Gene Grossman; Jean Tirole; Robert Wilson and Paul Milgrom
•2008: Lars Hansen and Thomas Sargent, and Christopher Sims; Martin Feldstein; Armen Alchian and Harold Demsetz
•2009: Ernst Fehr and Matthew Rabin; William Nordhaus and Martin Weitzman; John Taylor and Jordi Gali; and Mark Gertler

The winner will be named overnight on October 12 (NZ time).

Keeping up with the Kims
While the world media show little desire to throw the spotlight on most of the world’s dictatorships – give or take the odd disaster – North Korea is an exception.

It is a niche offering – a hardline communist state with one of the world’s few personality cults, a basket-case economy that cannot feed its people, and its secrecy is guaranteed to provide plenty of bizarre copy.

The latest focus is on the crowning of a third generation Kim to succeed the Dear Leader, who is widely believed to be about to follow his father to the Korean Workers’ Party heaven.

Western media have picked out Kim Jong Un, who is in his late 20s, as that man, though he woefully lacks the understudy experience of his father, who was in his 50s when the Great Leader died.

But there is a Plan B, with the Dear Leader’s sister (just elevated to a four-star general) and her husband, a powerful military figure, standing by ready to run the show.

Out of the welter of recent stories on the KWP’s first big get-together in 30 years, perhaps the best was this account by the London Independent’s David McNeill, who was attending a film festival.

He and some colleagues managed to escape their minders for a brief early-morning sortie to a semi-legal market before they were caught.

Another oddity is this piece from Speigel Online, which throws doubt that pictures of Kim III are the same person; in other words, the one-time Swiss school boarder is not the new four-star general along with his auntie.

Hope for India
This country may have worked itself into a lather over Paul Henry’s views of Indians and the chaotic lead-up to the Commonwealth Games.

But as those most knowledgeable about India predicted, the opening went ahead as scheduled and, like an Indian wedding, it was spectacular on the day (or night).

But what many might not appreciate is that the Games are only part of the larger picture.

While the Games have been the biggest world event staged since India's independence, they coincide with the largest ever inflow of foreign investment – some $US5.43 billion in September alone and a record $US19.43 billion since the year began.

The total is likely to reach $US25 billion, thanks to a booming sharemarket and the floating of state-owned enterprises. The amount raised so far this year has already topped the previous record of 2007, with at least three big ones yet to come.

The main blue chip index, the Sensex, is near its all-time record level, according to Bloomberg, and is the best-performing in the world this year – yet is still not at the bubble level, BNP says.

I will leave Economic Times columnist TK Arun with the last word:

“India is not just chaos and dirt and violence. If there is one thing that suffuses India’s collective consciousness today as never before, it is hope — hope that things would improve, drastically, and for everyone.”

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On the currency carousel