An Interesting Econ Chart

I have found a interesting chart on the different modern branches of economics and their predecessors browsing through different articles on Economic theory. I have yet to decide where I stand, especially since I can see that there are tremendous flaws in each of the many approaches to solving the tough economic issues of our time. 

The chart describes the common economic spectrum found in the field today. As you can see, there are many branches, from the anarcho-capitalists on the left to the post-Keynesians and the Marxians on the right. I think it's interesting that they have inverted the common left-right dichotomy. Despite the chart listing the most common modern approaches, I think there are other schools that are missing from this chart. They could also go with a multi-dimensional approach, by organizing them in a more detailed manner.

There is another chart on the many various non-Austrian libertarians, but I'm not going to post that. It's interesting that I'll be reading Robert Nozick's Anarchy, State and Utopia, as I've heard about his interesting interpretations of the non-aggression principle, while simultaneously rejecting the canonization of John Locke that other libertarians seem to prescribe to. It'll also be interesting to compare with A Theory of Justice, which was one of the books that I immensely enjoyed reading during my undergraduate years.

January Reading List

It's not January yet, but I've decided to post my January reading list. This is included with a couple of books I have not managed to finish this month.

Economics Books:
1. William Easterly     - The Tyranny of Experts
2. William Easterly     - The Elusive Quest for Growth
3. Carl Menger            - Principles of Economics (re-read)
4. Kenneth Pomeranz  - The Great Divergence

Other Books
1. Richard Feynman    - Surely You're Joking, Mr. Feynman!
2. David Hume            - A Treatise of Human Nature (re-read)

Thoughts on the economic benefits of renewed US-Cuba relations

As everyone is reading the morning paper or the news the last week, one of the most tense diplomatic relations in the history of the United States has finally been resolved. The United States has announced that they are moving to normalize relations with the island nation of Cuba after over 53 years after the implementation of diplomatic severance and economic embargo. This means that trade relations will be repaired between the two nations, which will help to reshape the Cuban economy. The Cuban economy has already been reshaped in the previous years by certain reforms implemented with varying results of success. There are certain activities that need to dealt with in more depth, such as good reform policies, smooth monetary conversion and reform of social institutions. Through the diplomatic restart and the economic benefits it will create, I believe these changes will create enormous economic benefits, despite the qualms that Senator Marco Rubio and others have towards the decision.

It is quite understandable that many, like Senator Rubio, would have problems with the current administration's policy towards the normalization of trade relations with Cuba, but the potential economic benefits are too enormous to ignore. A recent series of papers published by the Brookings Institution talked about the particular challenges in Cuba's shift away from a Stalinist-style central planned economy to a market socialist economy much like the one we see in mainland China or Vietnam. These six papers talk about the current conditions and the changes that are possible in the coming years to make this transformation happen. I think the articles are very informative of the particular situation, both long term and short term, that Cuba will face in the upcoming decade. Organized by the Brooking Institution's Latin American Initiative and the University of Havana's Center for the Study of the Cuban Economy, the six parts talk about important issues that concern this massive leap forward for the Cuban economy. There are several important points that I derived after quick glances at each other of the papers and I have listed them in the subsequent paragraphs.

1. Introduction and Overview - In this introductory section, Richard Feinberg summarized the six papers and provided the readers with the key points of the papers. These points are as follows:

• Cuba's new growth model vs the old growth model
• Building New economic institutions to sustain necessary market reforms
• The State and the Market -> How current political institutions interact with the newly created market economy
• Comparative Experiences in Asia and Latin America -> How Cuba compares to similar reform processes and utilizes Costa Rica as a comparison. 
• Tough Choices: Monetary Reforms and Exchange Rate Regimes -> Ideas and Reforming Cuba's dual-currency regime

2. Policies for Economic Growth: Cuba's New Era - This paper comes out with some particularly interesting ideas about policy ideas that Cuba could possibly implement in the coming decade. The paper focuses mostly on the structure of the Cuban economy and brings up interesting policy recommendations for the Cuban economy. Overall, I think Dr. Cordovi and Dr. Perez bring up interesting points on the need for both macroeconomic re-adjustment of planning policies, coupled with certain challenges in "microeconomic bottlenecks". I think it's special great that the two economists contend it's necessary for there to be an open discussion among economic decision-makers and policy theorists in Cuba.

3. Economic Transformation and Institutional Change in Cuba - Antonio Romero organizes this article into four main sections, which include the current economic transformation and possible steps to achieve maintain the economic change will clearly be implemented smoothly. By protecting these non-state economic enterprises with appropriate social enterprises and with clear established economic and administration decentralization, Dr. Romero makes great points in developing Cuba's economic transformation.

4. Institutional Changes of Cuba's Economic Social Reforms - Carmelo Mesa-Lago clearly articulates that there could be negative consequences to the institutional changes that Cuba has undergone, along with the many obvious positive consequences. While the institutional reforms have managed to develop the early beginnings of key economic institutions that are similar to those that are seen in the market socialist economies of China and Vietnam, there could be more enormous downside during the restructuring process. Dr. Mesa-Lago makes an important point about certain elements of the Cuban regime that might want to prevent the reforms from taking smoothly, especially in their deeply entrenched economic interests. He makes a good point in stating that these reforms should preferably happen under the current political leadership of Raul Castro, just in case the next leader decides to abort the process.

5. Economic Growth and Restructuring Through Trade and FDI - Costa Rican Experiences of Interest to Cuba - Alberto Trejos puts forward a solid case for the the applicability of the economic plan due to similarities between pre-reform Costa Rica and the current situation in Cuba. I think there are some merits to his argument, but it might not be the most feasible solution due to the enormous differences in political and social institutions between the two countries.

6. Monetary Reform in Cuba Leading Up to 2016 - Between Gradualism and the the "Big Bang" - Pavel Vidal Alejandro and Omar Everleny Perez Villanueva compare and contrast the two approaches to monetary reform in Cuba. Cuba currently has a dual-currency regime, between the Cuban Peso and the Convertible Cuban Peso, ever since its implementation in 1994. This has created enormous tensions between sections of the Cuban population due to the creation of a two-tier class system and the Cuban authorities see this as a key step to their economic reforms towards a market socialist system. I believe that a gradual monetary reform will benefit Cuba, but it cannot be put off for too long.

7. Exchange Rate Unification: The Cuban Case - Augusto de la Torre and Alain Ize talk about Cuba's drive to unify the currency system, which was a topic explored in the fifth paper of this paper series. They talk about the possible ways to unify the Cuban currency, along with certain methods in keeping each of the particular Cuban industries in mind. The most interesting aspect of this paper was the three particular choices they had in implementing the new exchange rate unification regime, which regrettably

Overall, I find this particular paper series by the Brookings Institution an enlightening and thoughtful read. It is evident that Cuba's road towards becoming an economic success story will be long and hard, but there are obvious benefits to the Cuban people. The ideas that are provided in these articles might not be implemented, but they showcase the beginning of an economy that will move from relative autarky to integration with the global economic system.

There are naysayers like Senator Marco Rubio, who has berated the resumption of diplomatic activities as a concession towards the dictatorial Cuban communist regime. Despite the obvious concerns that Mr. Rubio has brought attention to, there are other possible complications that might interfere at the speed of which the current developments are coming into fruition. A New York Times article, written by Neil Irwin, describes the possible complications that could come from America's renewed economic relationship with Cuba. The article brings up the thoughts of a recently published book written by Gary Hufbauer and Barbara Kotschwar, which would interest those that are concerned about the process of American economic normalization with Cuba. Gary Hufbauer, who formerly worked in the Nixon Administration during its normalization process with the People's Republic of China, talked about how it was of utmost importance that Cuba moves along with critical reforms. It is highlighted that they want it to be done correctly according to what they think would be beneficial for Cuba. It's highly unlikely that they would be able to implement such changes, but integrating Cuba into the global economic benefits would bring enormous benefits for the general Cuban population. If they could taste the outside world, then their situation could perhaps improve immensely.

By reviewing the information that I have gathered here, it should be evident that the benefits that United States could gain from the restoration of economic relations with the Cuba outweigh the detriments of such decisions. I believe that these changes will have a profound impact on the Cuban population in improving the economic well-being of the average Cuban, which will enable the average Cuban to be a lot freer than before. It will also open the door to American businesses in sectors like agriculture and it could prove to be a boon for established American companies, not just cigar importers.

Russia Bankrupt and Will Collapse? Not so fast!

As many of you guys have been following the latest stories in the Western media about the great collapse of the Russian economy and Putin's tyrannical regime ending. I think these sensationalist remarks on how Russia is doomed to repeat the financial crisis of 1998 are just ridiculous. I mentioned in an earlier blog article about the dive in the value of the ruble is currently linked to the price of oil, but this doesn't mean Russia will always be like that. Since I'm a huge fan of graphical presentation of statistical data, here is the Bloomberg chart of the current situation here:

This chart is Bloomberg's interactive RUBUSD (Russian Ruble to US dollar) interactive exchange rate chart and I have transposed the price of Brent Crude oil onto it. From the looks of this particular chart, it shows you how interconnected the Russian ruble US dollar exchange rates are with the price of crude oil on international energy markets.This illustration has been put on the Western news media and interpreted as a way to prove that the Russian economy is going to collapse. I believe that the Russian economy will definitely be hurt in the short term as they do not have fully diversified their economy beyond the natural resources as they are currently a rentier economy. A rentier economy is an economy of a state that mostly seeks to sell its natural resources to external economies. In Russia's case, they are not quite a rentier state due to the sheer size of the country's economy and its economic potential.

The Russian economy has a relatively developed economic infrastructure, a highly skilled economy and one of the largest natural resource bases of any country in the world. Articles like this illustrate the sheer potential of the Russian economy, so I think it's too early to say that the Russian economy will not recover in the medium to long term, much to the dismay of Western policymakers. As with every single set of information that is available out there, I believe it's important to take a holistic view of every single economic situation, especially this one.

Another Financial Crisis Coming Down the Road? Maybe? Maybe not? I think it will come from the emerging market economies.

I think there will be another financial crisis in the coming years, regardless of what the Federal Reserve chairman and vice-chairman say in their calm jargon-laden public addresses. There are many articles out there on the internet that are trying to anticipate where the next financial crisis will come from. I believe this next up and coming economic crisis will not originate in the developed world, as the economic lull has finally been somewhat mitigated by the Fed's scrumptiously stimulating quantitative easing. I believe a financial crisis will most likely come with the appreciation of the US dollar and the depreciation in commodity prices. This will impact the financial stability and health of these developing emerging market economies, which will be the impetus for the next global economic crisis. After careful consideration, I have found a couple of articles that are really worth reading, with a couple of them by the famous Korean macro-economist, Hyun-Song Shin, who is famous for his work on global games.

The presentation by the famous economic theorist, Hyun-Song Shin, who also happens to work on the field of global games, concerns financial stability risks. (For those who are unfamiliar with global games, the Wikipedia article gives a bit of insight on it, even though I don't think Wikipedia is the best place for it. A better place to learn about global games is to directly read Dr. Shin's published article, even though it's a challenging read.) Two important points in the presentation that Dr. Shin's gave at the Brookings Institution:

1. Based on his perspective, a stronger US dollar could result in negative consequences for the global economy, which could ultimately impact the global economy.
2. Financial markets' problems could shift to other arenas (such as emerging economies)

This particular article helps to loop this presentation by Dr. Shin with concrete conclusions. The two points I had brought up previously is expanded upon in this brief article. I believe that a stronger dollar will lead to significantly problems for some emerging markets' central banks, such that of the BRICs. This could be mitigated by their new plan to decouple themselves from their surmised disinclination of the dominant position of the US dollar. I think their plan might come too late and the next crisis will occur before their transition, which might cause them to put off their plans to decouple from the current denominated world system.

(To those interested in following Dr. Shin's presentation, the link also provides audio recording of Dr. Shin's presentation)

Another article to be considered is the latest BIS article, whom Dr. Shin co-authored with two others. The article explores the emergence of non-financial corporations from the emerging market economies (EMEs), such as from China, who are partaking in a substantial increase in cross-border capital flows. I think this increase will not just be significantly impacted by a stronger US dollar, but it might lead to an increase in this particular activity. This will have a significant impact on the EMEs' financial stability, which I think will prove to be troubling to the long-term financial health of these EMEs. This should be a deep worry for both economists and financial policymakers in the coming years.

December Reading List

It's been a while since I last posted in this blog, but I will post my December Reading List!

Econ Books:
1. Why Nations Fail - Daron Acemoglu, James A. Robinson
2. On the Principles of Political Economy and Taxation - David Ricardo

Non-Econ Books:
1. The End of History and the Last Man - Francis Fukuyama
2. Theory of Games and Economic Behavior - John Von Neumann and Oskar Morgenstern (re-read)
3. Problems of Philosophy - Bertrand Russell

I will try to write a couple of articles early next week to make up for the lost time!

Purpose of this Blog/Post

The true purpose of this blog post is to explain that this particular blog is not to post personal opinions or anecdotes, but to test out my ability to connect the dots in certain circumstances that are relevant. Some of the material covered here might be somewhat controversial, but they recount the steps that I have taken in order to prove a certain point, whether it is real or not. I am not an expert economist at all, but this will be used as simple practice.

Swiss Referendum on Gold and its wider macro ramifications

An interesting development is coming out of Switzerland, home of pretty mountains and secretive banking. 100,000 Swiss voters have signed a referendum calling for the government to maintain what many call a "partial gold standard". This move requires the Switzerland National Bank to hold 20% of its monetary reserves in the shiny gold bullion. This is big news to anyone following money and government monetary policies, since the gold standard has been used many years in the past. The world financial system has not been actively connected to gold since a couple of years after the Nixon Shock with references to gold removed by a 1976 government decree.

There are several reasons why this referendum is also big news:

1. The recent huge surge in gold reserve purchases by Russia, by India and by China
2. Long term of gold and other currencies that challenge the supremacy of the US dollar as the future reserve currency

The question is if Russia and China are buying up a lot of gold, what are their central banks going to do? Are they diversifying away from using the dollar as a fiat backer of their reserves or are they trying to establish a partial gold standard? There has been speculation for years that the Chinese government working in tandem with the Chinese Central bank has been planning for a Gold-Backed Yuan. Alan Greenspan, who is no stranger to central banking and monetary policy, said recently in an Foreign Affairs article published last month seemed to hint at China's resurgent gold reserve policies that were of huge importance to that of the United States. What's interesting is that Alan Greenspan has come out recently and mentioned that he's worried about the future of monetary policy, but also that gold should be a "good place to put your money these days given its value as a currency outside of the policies conducted by the governments. These statements don't surprise any of us that have been following Alan Greenspan. This goes back to his earlier associations with Ayn Rand and her Objectivist collective that he had participated in, with him penning Gold and Economic Freedom in Ayn Rand's book, Capitalism, the Unknown Ideal. He must think of the massive quantitative easing that the Federal Reserve has undertaken and the impending currency crisis that the Federal Reserve will eventually face.

Where does this lead us to with the Swiss referendum? If the policies on the referendum pass the voters, it would have to go through the many cantons within the Swiss Confederation. If this vote can pass, it would have huge ramifications on the gold markets, the financial markets and the world fiat currency system. If countries that are much larger in scope and in size, like China or Russia, also adopted similar currency laws for their Central Bank, it would create enormous demand for gold, driving up gold prices, while decreasing worldwide demand for the current reserve, which is the US dollar. This vote could have significant macroeconomic ramifications for the world.

Johan's November Reading List

Since I will be mostly likely very busy for the rest of this month and most of next month, I've decided to post my November reading list! There are 4 books I'm planning on reading and not all of them are Econ-related.

1. Avinash Dixit, Barry J Nalebuff - Thinking Strategically
2. Roger B Myerson - Game Theory: Analysis of Conflict
3. Thomas Piketty - Capital in the Twenty-First Century
4. Francis Fukuyama - Political Order And Political Decay

Russia Ruble, Gold Reserve Purchases, Depressed Oil Prices

Russia's ruble has made financial news as of late, just as their conflict with their neighbor, Ukraine, has been frozen in the last month or so. Western sanctions have had a profound effect on Russia's monetary policy and the value of its currency, the ruble. According to the latest data, they have made another currency intervention by purchasing ruble from its mostly dollar-denominated currency reserves. This has been done to keep the ruble from falling even further down versus the US dollar, due to US and Western sanctions on key sectors of the Russian economy. This event coupled with falling oil prices have marked a perfect storm for Russia, but Russia has silently been buying up gold reserves. Does this mean that Russia will attempt to entirely decouple from the Western financial system? The answer is probably no, but they are slowly moving away from basing their international trade activities on the US dollar.

I have compiled two charts from Bloomberg that illustrate the falling ruble and the Russia's foreign exchange reserves, which includes gold.

By looking at these Bloomberg charts, we can see that Russia's ruble has weakened from around 36 Russian rubles to one US dollar to about 41 to 1. There is sharp drop in the value of their currency, coupled with the sustained drop in their official foreign exchange and gold reserves from $500 billion dollars to about 450. While these official estimates might not be realistic, especially due to Russia's resurgent gold bullion purchases, they mark a country mired in recession due to Western sanctions and the costly war with Ukraine. Russia has emerged as officially the country with the 5th largest currency reserve in the world, which fuels speculation of their real motives. Along with China, Russia has been purchasing gold bullion at record amounts, could they be underestimating their real gold bullion numbers? We do know that their $13 billion worth of currency interventions this month shows real weakness in the value of their currency, but does this indicate that Russia is in a free-falling economy or does it have to do with Western sanctions? I think it has more to do with strongly falling oil prices since the ruble is, in my opinion, more or less a petro-ruble, similar to other petroleum-based currencies. This could change if they continue with their gold reserve purchases and changes in central bank policies. Could this be a gold-backed ruble?

By looking at the sudden drop oil prices, which reached a peak of about $105 (WTI) and $115 (Brent), oil has taken a sharp dive and prices hover around $82 (WTI) and $86 (Brent). This sharp correction has also influenced Russia's currency reserves and the price of its currency, which means sharp economic and budget problems for the Kremlin to handle. If this slide continues and coupled with more debt downgrades by S&P and Moody's, we could see Russia's currency sink further and will require more further currency interventions. Could we see Russia's central bankers make more aggressive monetary decisions regarding the state of its falling currency? In the future, there is very much reason to believe that they might discard SOME if not ALL of their US dollar-denominated assets. Could this also lead to a more politically and militarily belligerent Russia? We will have to wait and see what unfolds...

China's Growing Debt Since the Financial Crisis

An interesting article came up today when I was reading my usual couple of websites, which includes the Economist. This article concerned China's growing debt to GDP ratio that seemed to accelerate ever since the 2008 Financial Crisis. The growing debt seemed to be fueled by the growing credit boom, which has been further fueled by continued speculative construction. As the Chinese economy slows, most of this debt then increases to dangerously high levels, which is currently reaching at a level of above 200% of GDP. This number should be something to watch in the years down the road. The article doesn't mention much about the possible global implications for a possible meltdown, but if it does, I predict it could be worse than the 2008 Financial Crisis.

In another article that is connected to the other article, the piece gives us an idea of what the Chinese authorities could do to mitigate the inevitable. By looking at the chart that the article provided, most of this recent debt boom is from the credit-fueled continued construction bubble that is undertaken in China. The International Monetary Fund has warned repeatedly about the discerning possibility of a sharp and eventual Japan-style property meltdown. There could be many policies implemented in fixing this looming problem, but one of the main things that the international community and China could do is rein in the deep obsession with GDP growth and focus on other more important issues.

2014 IMF October 10-12 Meeting

The IMF held their annual meeting in October 10-12, 2014, the link to the meeting could be found here. On the opening day, the Managing Director of the IMF, Ms. Christine Lagarde talked about 3 key important factors that effected the world economy:

1. Acceleration  and Stagnation
2. Stability or Fragility
3. Solidarity or Seclusion

Overall, her speech made a good point about how the member countries needed to come together like in 1944, not bicker over things like in 1914.

Other interesting speakers throughout the week included the World Bank President, Jim Yong Kim, Paul Krugman and other speakers. It also included a CNN Debate at the George Washington University. Overall, it featured excellent speakers on the issues that effected individual regions around the world. There are many critical issues which the world faces, but most importantly, the great thing about the Fund is that it helps to coordinate action among the 188 member countries.

Asia's Development and Clean Coal Technology

In my last blog entry, I talked about the article I had read in the New York Times concerning current developments over China's new competitive banks. In this entry, I want to explore one specific part of that article, which concerns the application of coal and of possible usage of clean coal technology that would make a difference in these developing regions. Due to the cheap costs of coal and the usage of clean coal technology, it could prove to be a big difference in the region.

Environmentalists might not like the idea of using coal energy, but it can help these developing economies kickstart their economies. Coal is dirty, pollutes the environment and requires stripping the mountaintops, but the economic benefits to it are enormous. It can enable these economies to get started before transitioning to more cleaner kinds of energy at a later time. To weigh the pros and cons of coal energy, here's an article on this topic.

China, Global Institutions and US Opposition

In a New York Times article that I had read 2 days ago, it described an interesting situation developing between China and the United States over the role of global and regional organizations. President Xi Jinping and the Chinese government had proposed and had pledged a new development bank that targets its neighbors and Asia. This is the latest manifestation of US-China competition within the great Asia-Pacific rim area, especially in the realm of global financial institutions.

Towards the end of World War 2, the Bretton Woods Conference had set up international financial institutions such as the International Monetary Fund, the World Bank and other associated agencies, such as the Asia Development Bank. With the surfeit of money that these agencies had, they have been doing good work around in the arena of global development. They had promoted doing good work in its provisions of global financial management, but now with the rise of China as a major financial player in the world, I believe there are needs to be addressed in this arena.

The US government has been worried that the founding of China's new development bank will severely undercut the Bretton Woods institutions that had been set up many years ago. I think this is a good opportunity for the institutions to work with each other. They can use the World Bank's experience and expertise coupled with China's newly minted financial strength in order to mitigate any misunderstanding, which could lead to mutually cooperative and constructive policies, versus mutually destructive competition. In the New York Times article, the Asian Development Bank had estimated that over 8 trillion dollars is needed in just transportation infrastructure, which is an amount that both the A.D.P. and the World Bank cannot afford to lend to these regions. I think it's time for the Obama administration and the US government to step up to the plate and to put a bigger commitment in mutually cooperative and beneficial policies.

Aging Demographics and Possible Solutions

As I was rummaging through the many articles today, I stumbled upon a particularly interesting article in the Economist. The article deals with changing demographics and creating employment challenges. I think this is more and more relevant as time goes on, especially when it comes to changing labor demographics, especially in OECD countries such as the United States.

An interesting chart to compare the differences in demographics between the United State, China and Japan: here

What this chart does not illustrate is that Japan has already aged versus the United States! While China's economy is growing robustly now, the Chinese economy will not go much further with its current growth models without fundamental changes to the structure and to the health of its economy. When shifts in change of demographics happens, it will turn many of American entitlement programs that are taxpayer funded into even bigger behemoths of debt than before! Altering such programs seem impossible currently with the deadlock in Congress...

There are real solutions to this problem, which include policies that might upset populist or nativist groups such as lax border policies and immigration. What these people need to remember is that some of them came here "illegally" on Ellis Island! Here are some possible tips that can be used to fix the current debt problems and generating potential growth opportunities in the economy:

1. Promote MORE Immigration (Both Skilled and Unskilled) to fix the demographics program.
2. Promote Math and Science in schools as a fundamental way to promote new innovation and growth.
3. Robust ALMPs (Active labor market policies) in placing people into high-tech, new-growth industries.
4. Cutting Corporate Taxes.

While these certain policies will not generate the much needed revenue the federal government needs in order to sustain these life-saving programs for many, I think it is necessary for these policies to be effectively implemented to change the structure of the US economy in congruence with the aforementioned changing demographics. The specifics of these particular policies might differ in how they could be implemented, but I believe they could be very effective in targeting specific problems.

China's Anbang Buys New York's World Famous Waldorf-Astoria

10/9/2014

I don't think it's new news, but earlier this week, a small firm from China bought New York's world famous Waldorf Astoria Hotel.

Link to the news is here

What's interesting is that during the beginning of the liberal economic reforms is that the mastermind behind the opening up stayed at the Waldorf Astoria Hotel. It's also reminiscent of Japan's buying up of another Art Deco building design, The Rockefeller Center. It brings up back to the idea of the unsustainable housing bubble, which is somewhat connected to this article. How long will China be able to sustain such high asset prices on property? It looks like the Chinese government can definitely do so, with a high demand for housing and a growing GDP, which creates further demand for housing. The International Monetary Fund has just listed it as surpassing the US in their annual Purchasing Power Parity Calculations for this year. Not surprising at all, as it is all over the media.