Iceland’s recent devaluation was highly orthodox policy condition for wards of the IMF (strings attached to a $2 bn. loan). Unfortunately, such devaluations often backfire by inflating commodity costs, interest rates and the burden of foreign debt. The Icelandic krona fell from 64 to the dollar in 2007 to 123.6 in 2009, before strengthening with the economy to nearly 116 in 2011.Since oil, grains and metals are priced in dollars, the 2008-2009 devaluation inflated Iceland’s cost of production and cost of living. Inflation rose from 5.1 percent in 2007 to 12 percent or more in 2008 and 2009; real GDP fell by 6.8 percent in 2009 and 4 percent in 2010. Faced with a collapsing currency, the central bank interest rate was hiked to 18 percent by October 2008. It could have been worse. If Iceland’s Supreme Court had not nullified loans indexed to foreign currencies in June 2010, devaluation would have doubled the cost of repaying foreign debt.Devaluation was supposed to boost GDP by making imports costly and exports cheap, thus narrowing the trade deficit. The current account deficit did fall after 2008, but that always happens when recessions slash imports. Ireland had a current account surplus from 2010 to 2012 without devaluation, even as Iceland’s current account deficit was still 7-8 percent of GDP.Iceland’s economy grew by 3.1 percent in 2011 when the currency appreciated and the budget deficit was deeply cut to 4.4 percent of GDP. Devaluation explains the previous spike in inflation and interest rates, but little else.
The art of economics consists in looking not merely at the immediate hut at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups—Henry Hazlitt
Saturday, May 25, 2013
Iceland’s Recovery: Hardly about Currency Devaluation
Thursday, May 23, 2013
Moody’s on the Philippines: No Property Bubble, Move along Nothing to see here
Real estate has again become a hot-button topic after banks saw their exposure to the industry breach regulatory limits in 2012. At P821.7 billion and comprising 20.9% of their total loan portfolio, the amount exceeded the BSP-mandated 20% cap.The breach, though, was due to a new definition of "exposure." Banks were required to report not just real estate loans but also investments in debt and equity securities that finance real estate activities. These activities range from the acquisition, construction and development of properties, as well as buying and selling, rental and management.Banks also had include loans for socialized and low-cost housing developments, which were previously exempted from the reportorial requirements.Mr. Tremblay said the figure was no cause for alarm, noting: "The new definition of ‘exposure’ includes loans to low-cost and socialized housing and these segments tend to be less susceptible to speculation."The BSP is mulling raising the 20% cap to accommodate the new definition as well as property market growth since 1997, when the limit was first introduced."Prospectively, we are not too fixated on any specific numerical cap. There is no magic number that can determine the point beyond which real estate exposure becomes a credit concern," Mr. Tremblay said.The focus, instead, should be on factors such as demand and supply, underwriting standards, loan-to-value ratios and the leverage of households and firms. These can more accurately show whether the appreciation of prices and borrowers’ behavior is driven by fundamentals or speculation, he pointed out."So far, trends in these areas have remained within reasonable limits," Mr. Tremblay claimed. -
Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default.
Friday, April 05, 2013
Happiness: A Worthwhile Purpose in Life
Happiness has been defined in myriad ways over the centuries by some of the world’s greatest thinkers. Aristotle described happiness as a condition rather than a destination. Ralph Waldo Emerson referred to it as a journey.But I think Viktor Frankl got to the heart of the matter even better when he explained that if there is a reason for happiness, happiness ensues. Happiness, said Frankl, is a side effect of having a purpose in life.In his book Man’s Search for Meaning, Frankl explained, “What man needs is not a tensionless state, but rather the striving and struggling of some goal worthy of him.” In other words, man’s purpose in life is not to achieve goals, but to constantly strive toward them…
Regardless of whether protest marches have to do with world peace, eradicating poverty, or saving whales from extinction, the reality is that they do not fill the void inherent in a meaningless life. If man were to succeed in ridding the world of all disease, poverty, pestilence, famine, and war, what then would be the purpose of his existence?As the struggle for man’s day-to-day survival has increasingly subsided, an important question has emerged: survival for what? In other words, just having the means to live is not enough; a person must have something to live for…
And if there is no purpose to an individual’s life — no meaning — then there’s no reason even to get out of bed in the morning, no reason to be alive. In the words of the great Albert Einstein, “The man who regards his life as meaningless is not merely unhappy, but hardly fit for life.”The more I reflect on the question, and the more I draw from my own experience and the experiences of others, the more convinced I am that striving toward goals is not a means to an end; striving is an end in itself. Those who wish their lives away in anticipation of achieving some long-awaited goal do themselves a grave disservice…The fact is that it’s possible to achieve all your goals in life, yet miss out on life itself. And the best insurance policy against that happening is to have a worthwhile purpose in life and live in the present.
Saturday, March 09, 2013
Quote of the Day: Differentiating Reality from Perception of Reality: Principle versus Opinion
While it’s true that everyone perceives reality differently, reality could care less about our perceptions. Reality does not change to adapt to our viewpoints; reality is what is. Reality is fact. Reality is truth.Reality, however, is not always a known, which is where perception of reality comes in. While reality is a fixed factor in the equation of life, perception of reality is a variable.This is why it is so important to learn to differentiate between a principle and an opinion. The most significant aspect of a principle is that it can neither be created nor altered. Thus, a principle is the essence of reality. It is what it is, and it’s up to us to discover it.The problem arises when people refuse to accept the reality that principles can only be discovered, and instead choose to believe they can create their own principles. Which means they believe they can create their own reality, and that’s a belief that can lead to disastrous consequences.
Wednesday, February 20, 2013
Does Unemployment Cause Deflation?
By destroying the basis of reckoning values—the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly—inflation shakes the system of calculations in terms of money, the most important aid to economic action which thought has evolved. As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital. In the usual, and indeed the only possible, kind of capitalist book-keeping, inflation creates an illusion of profit where in reality there are only losses. As people start off from the nominal sum of the erstwhile cost price, they allow too little for depreciation on fixed capital, and since they take into account the apparent increases in the value of circulating capital as if these increases were real increases of value, they show profits where accounts in a stable currency would reveal losses. This is certainly not a means of abolishing the effects of an evil etatistic policy, of war and revolution; it merely hides them from the eye of the multitude. People talk of profits, they think they are living in a period of economic progress, and finally they even applaud the wise policy which apparently makes everyone richer.But the moment inflation passes a certain point the picture changes. It begins to promote destructionism, not merely indirectly by disguising the effects of destructionist policy; it becomes in itself one of the most important tools of destructionism. It leads everyone to consume his fortune; it discourages saving, and thereby prevents the formation of fresh capital. It encourages the confiscatory policy of taxation. The depreciation of money raises the monetary expression of commodity values and this, reacting on the book values of changes in capital—which the tax administration regards as increases in income and capital—becomes a new legal justification for confiscation of part of the owners' fortune. References to the apparently high profits which entrepreneurs can be shown to be making, on a calculation assuming that the value of money remains stable, offers an excellent means of stimulating popular frenzy. In this way, one can easily represent all entrepreneurial activity as profiteering, swindling, and parasitism. And the chaos which follows, the money system collapsing under the avalanche of continuous issues of additional notes, gives a favourable opportunity for completing the work of destruction.
Sunday, October 28, 2012
Phisix: Holiday Abridged Sessions Unlikely an Obstacle to the Year End Rally
The subject matter of all historical sciences is the past. They cannot teach us anything which would be valid for all human actions, that is, for the future too. The study of history makes a man wise and judicious. But it does not by itself provide any knowledge and skill which could be utilized for handling concrete tasks.
What we are ultimately talking about is an “unusually uncertain” distribution of potential baseline outcomes, as well as unusually shaped tails. This inevitably undermines the robustness of lots of conventional wisdom, as well as a range of historical contracts and entitlements. It also challenges the agility of institutions in both the public and private sectors.
Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed…Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit. During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.
At the outset of every step forward on the road to a more plentiful existence is saving--the provisionment of products that makes it possible to prolong the average period of time elapsing between the beginning of the production process and its turning out of a product ready for use and consumption. The products accumulated for this purpose are either intermediary stages in the technological process, i.e. tools and half-finished products, or goods ready for consumption that make it possible for man to substitute, without suffering want during the waiting period, a more time-absorbing process for another absorbing a shorter time. These goods are called capital goods. Thus, saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization. Without saving and capital accumulation there could not be any striving toward non-material end
Tuesday, October 09, 2012
Quote of the Day: An Empirical Law Lacks the Guarantee of Absolute Validity a Priori
Among economists the opinion often prevails that the empirical laws, ‘because they are based on experience,’ offer better guarantees of truth than those results of exact research which are obtained, as is assumed, only deductively from a priori axioms …Testing the exact theory of economy by the full empirical method is simply a methodological absurdity, a failure to recognize the bases and presuppositions of exact research. At the same time it is a failure to recognize the particular aims which the exact sciences serve. To want to test the pure theory of economy by experience in its full reality is a process analogous to that of the mathematician who wants to correct the principles of geometry by measuring real objects. . . .An empirical law lacks the guarantee of absolute validity a priori, i.e., simply according to its methodological presuppositions …To want to transfer [the empirical method] to the results of exact research is, however, an absurdity, a failure to recognize the important difference between exact and realistic research. To combat this is the chief task of the preceding investigations.”
Sunday, May 13, 2012
Quote of the Day: The Value of Superfluous Fluff
Some economists like to believe (although this belief has blessedly faded in the recent decades) that economics is an edifice built on the rocks of mathematical theory and statistical empiricism, and everything else is superfluous fluff. McCloskey (1983) thoroughly strafed that conceit, pointing out in “The Rhetoric of Economics” that the research and analysis of economists is built on uncertain and subjective judgments, and often uses, among its rhetorical tools, analogy and metaphor, appeals to authority and to commonsense intuition, and the use of “toy models” counterbalanced with the choice of supposedly illustrative real-world episodes.
Economic arguments rooted purely in mathematical formalism or statistical analyses are superb at specifying the steps leading to the particular conclusion. However, cynical economists (but I repeat myself) know that a model can be built to illustrate any desired conclusion, and that if the data are tortured for long enough, they will confess to anything. Persuasiveness requires a multidimensional argument that reaches beyond formalism. As McCloskey (1983) wrote: “There is no good reason to to make ‘scientific’ as opposed to plausible statements.”
That’s from economist Timothy Taylor on the issue of editing economists (hat tip Professor David Henderson).
Phony and manipulated “tortured” models function as standard instruments used to justify social controls through public policies. Think anthropomorphic global warming, Keynesian stimulus, mercantilism and etc…
Wednesday, February 29, 2012
Quote of the Day: Life is More than Math…
"It's not prime enough"
"That number is too even... can you make the next one even odder?"
The thing about math is that it's right or wrong, on or off, yes or no. Seven is a prime number, there's no improving it.
The thing about life/business/culture and the things we make and do is that they are not math.
From my favorite marketing guru Seth Godin. Indeed, life is about human actions.