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.”
On March 18, 2010,
in Currencies, WTF?,
by Tim
The Guardian reports that there’s more than just career risk when you fail at monetary reform in North Korea – you could lose your life, as Pak Nam-gi apparently just did.
North Korea has executed a senior official blamed for currency reforms that damaged the already ailing economy and potentially affected the succession, a news agency in South Korea reported today.
Pak Nam-gi was killed by firing squad last week, said Yonhap, citing multiple sources. The Workers party chief for planning and the economy had not been seen in public since January.
The 77-year-old was put to death as “a son of a bourgeois conspiring to infiltrate the ranks of revolutionaries to destroy the national economy”, the agency said.
But it reported that many North Koreans did not believe the explanation, citing one source who said: “The mood is the leadership has made Pak Nam-gi a scapegoat.”
If you’re not familiar with the story, you might be interested to know that North Korea introduced a new local currency a while back that could be exchanged for the old currency at 1-to-100 in an attempt to control inflation and drive out foreign currencies that were thriving on a very active black market.
Like most such attempts, this move did not produce the desired results – prices soared, hoarding increased, people starved – and, in the process, it wiped out the meager savings of many citizens while benefiting state workers who were paid in the new currency.
On March 16, 2010,
in Currencies,
by Tim
The funny thing about the escalation of the U.S.-China currency spat is that, apparently, both sides think things are going well enough that they can take something like this on.
From the Tom Toles collection at the Washington Post.
On March 15, 2010,
in Currencies,
by Tim
The war of words between the U.S. and China regarding the Chinese currency appears to be entering a new, more serious phase, particularly in light of developments on Taiwan arms sales, visits with the Dalai Lama, and Google’s imminent departure from the country.
Hopefully neither side will be reading Ambrose Evans-Pritchard’s latest thoughts on the matter as this could just push one or both sides over the edge.
China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.
Within a month the US Treasury must rule whether China is a “currency manipulator”, triggering sanctions under US law. This has been finessed before, but we are in a new world now with America’s U6 unemployment at 16.8pc.
“It’s going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we’re not going to get anywhere,” said Paul Krugman, this year’s Nobel economist.
It looks as though Krugman is taking a stand on the China currency issue, citing it as a “significant drag on the global economy” in commentary yesterday.
On March 15, 2010,
in Currencies, WTF?,
by Tim
I, for one, will be quite happy to someday see a completely new global monetary system, a much-needed development that is not likely to be painless or voluntary. Then, at least, we can stop reading reports like this one from the Associated Press:
Moody’s warning on US, UK ratings lifts dollar
The dollar got a lift Monday morning after a leading credit ratings agency warned that the U.S. and the U.K. could see a downgrade of their top AAA credit rating.
That triggered a pull-back from riskier assets such as emerging-market currencies and stocks as investors sought safety in the dollar.
…
While Moody’s Investors Service said the U.K. and the U.S. don’t face an immediate threat to their AAA ratings because they are still able to service their debts. Rising interest interest rates could make it more expensive to do that, however.
Investors fled riskier assets into the less-risky dollar that could lose its AAA rating…
Of course, it only works this way for the world’s reserve currency – the U.S. dollar – which is, in itself, a big part of the problem.
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