The Economist’s recently updated Big Mac Index seems to add credence to the views of Mr. Krugman over those of Mr. Roach from this item earlier today, part of an increasingly nasty dispute (at least, for economists) about China’s currency policy.
Does anyone know if there is any empirical data on using the Big Mac Index as the basis for a FOREX trading strategy? It seems pretty simple and, over the long run, would likely be profitable to bet against the overvalued currencies and go long the undervalued ones.
REMINDER: All investment, economics, and finance related material now appears at the new IaconoResearch.com. For the time being at least, this has become a personal blog covering a variety of mostly unrelated topics.
On March 19, 2010,
in Asia, Currencies,
by Tim
On March 19, 2010,
in Asia, Currencies,
by Tim
Economist Steven Roach of Morgan Stanley Asia has some not-so-kind words for economist Paul Krugman and his view that the Chinese currency should be allowed to strengthen considerably from its current level.
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Says Roach: “America doesn’t have a China problem, it has a savings problem … We should take out the baseball bat on Paul Krugman. I mean I think that the advice is completely wrong …. We’re lashing out at China rather than tending to our own business”.
According to this report, Krugman replied, “I’m a little surprised at Steve for saying that. What I said is actually based on pretty careful economic analysis. We have a world economy which is depressed by China artificially keeping its currency undervalued.”
At the rate they are going, someday we’ll be calling it “The Lost Century” in Japan as they now embark on their third “lost decade” with little sign of changing course. The scourge of deflation is once again being countered by a doubling of the Bank of Japan’s “quantitative easing” program, otherwise known as “money printing”, as reported this morning.
Governor Masaaki Shirakawa and his board increased the three-month loan facility to 20 trillion yen ($222 billion), the bank said in a statement after its meeting in Tokyo. They also held the overnight lending rate at 0.1 percent.
Shirakawa said there is no “miracle” cure to stem declines in prices that are deepening even as the economy sustains a revival from its worst postwar recession. Prime Minister Yukio Hatoyama’s administration, restrained from adding to fiscal stimulus by a record debt load, has been pushing the bank to do more to bolster growth.
The move “could implant a strong impression among the government that the stronger it presses, the more it can get from the BOJ,” said Mitsuru Saito, chief economist at Tokai Tokyo Securities Co. The expansion “is highly unlikely to shore up the macro-economy, while having only a limited impact on liquidity,” he said.
Nobel Prize winning economists Joe Stiglitz and Paul Krugman (among many others) are again talking about a “liquidity trap” and how this may not end well for more than just Japan.
As is the case for the Great Depression, any “liquidity trap” discussion always seems to begin with, “Here we are in an awful mess, how do we get out of it using the tools of mainstream economic theory?”, whereas, maybe, just once, they should start with, “Mainstream economic theory has failed us again, maybe we should do nothing for a while and see what happens or, better yet, improve economic theory so we don’t make messes.”
On March 16, 2010,
in Asia,
by Tim
While it’s sometimes hard to believe any of the economic data coming from the Chinese government, the recent reports on consumer prices might be a little more suspect than other data given that complaints about inflation are rising sharply.
The Telegraph reports on the unease that the 2009 credit creation binge and rapid money supply growth are producing here in 2010 as consumers notice prices rising around them.
A record number of Chinese have complained that inflation is at an “unacceptable” level, as the Communist party warned that its very future depends on tackling rising prices.
In its latest quarterly survey, the People’s Bank of China (PBOC), the country’s central bank, said that 51pc of respondents were unhappy about inflation, the highest proportion since the survey began in 1999.
In February, China’s consumer prices rose by 2.7pc year-on-year, up from a 1.5pc rise in January. The government has set a 3pc target for inflation this year, but some analysts have said the true inflation rate is already far higher, after an enormous increase in money supply last year.
In February, Chinese broad money rose by 25.5pc, well ahead of the government’s 17pc target for the year.
In developing economies like China, food prices have a much bigger weight in the inflation statistics than here in the West and, apparently, that’s becoming a problem as was seen back in 2007-2008. What’s surprising to hear today is that complaints are higher than they were back then. Recall that there were price controls and hoarding in a number of countries for such staples as rice and, now, price controls for pork in China are set to begin anew.
A year or so removed from the worst economic crisis since the Great Depression, it looks like China is going to blaze the trail into the uncharted territory that will likely dominate much of this decade – rising inflation due to money creation on a scale that the world has never seen.
Well, it’s about time they started reining in those banking bonuses in China and it couldn’t come at a better time after more than a trillion dollars in new lending last year and recent concerns that credit markets have become overheated.
An AP report in the Miami Herald details just how out-of-control the situation had become and what drastic steps are being taken by the Chinese government.
China has tightened controls on pay for its top bankers, joining global efforts to try to limit financial risks by linking longer-term performance more closely to compensation.
…
China’s top bankers are paid modestly by Western standards but receive many times the salary of the average Chinese worker, which has fueled public anger. Top banking and insurance executives are appointed by the ruling Communist Party.
The chairman of China’s biggest commercial lender, Industrial & Commercial Bank of China Ltd. was paid 1.6 million yuan ($235,000) in 2008, while Citigroup CEO Vikram Pandit received $38.2 million that year.
Last April, the government ordered top Chinese bank and insurance executives to take a pay cut to promote economic fairness.
The Wall Street Journal also ran a story($) on this today in which, for the print edition, they had the pictures of the six top banking CEOs atop each of their names, titles, and 2008 pay.
With compensation ranging from $220,761 for Xiao Gang, Chairman of the Bank of China, to $235,849 for Jiang Jianging, Chairman of ICBC as noted above, I thought for a second I was reading The Onion.
China Daily reports that consumer prices rose to a 16-month high in February, up 2.7 percent from a year ago, while producer prices are now rising at a 5.4 percent annual rate. This follows reports yesterday that, despite recent efforts to cool their housing market, property values saw year-over-year gains of 10.7 percent last month.
Food prices rose more than six percent from year ago levels and, while some economists say inflation will cool in the months ahead due to more favorable annual comparison, it should be clear that some of the recent $1+ trillion in government sponsored credit creation is now starting to show up in the prices of things other than housing and copper.
It doesn’t look as though this is helping the housing market cool off:
Facing ever-rising housing prices in China, only 18 percent of mothers told a recent survey they were willing to let their daughters marry men who only rent their homes.
Apparently, in a country where the male-to-female ratio is already higher than normal due to the “one child policy”, men are at a distinct disadvantage with their potential mother-in-law if they are not already, or soon-to-be, homeowners.
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