Author: Hafiz Noor Shams

For more about me, please read this.

Categories
Economics

[1520] Of Bernanke is serious

75 basis points cut.

WASHINGTON (AP) — The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory. [Fed Cuts Interest Rate. AP via Google News. January 22 2008]

Definitely a more effective move than a one-time tax cut.

And thinking back, I remember somebody asked for a 175 basis points cut back in September 2007. Well, he just got it in about 4 months.

Finally, I think, the Fed is the world central bank.

Categories
Economics

[1519] Of fiscal stimulus meets Ricardo

As calls for fiscal stimulus to jumpstart the US economy turn into roars, the White House presented a one-time tax break as a plan.[1] The plan however failed to convince the market that there is light at the end of the tunnel. Stock exchanges in the US continue to slide down while dragging along other exchanges across the world. Why is that so?

Others have pointed out Friedman’s permanent income hypothesis; temporary change in income does not affect spending. For me on the other hand, David Ricardo comes to mind yet again.

The issue with a temporary tax cut is that it is temporary. The tax cut adds up to the US budget deficit and a knowledgeable rational taxpayer would realize that somebody has to fund that deficit. Thus, the expectation that a tax cut today means an equivalent tax hike in the future. That expectation translate into a scenario which people will save the extra disposable income to pay future hike while consumption stays the same as if there were no change in tax level at all. This is more or less a Ricardian conclusion.

The problem with such reasoning is that individuals may actually appreciate extra cash in their hand in time during times of strained cash flow. The Ricardian conclusion fails to consider temporal discount that people apply to future cash flow. Yet, how many people actually operate their perception of future income in present value?

Regardless, at the moment at least, reality on the ground seems to indicate that one-time tax break might not work, just like in previous cases.[2]

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[1] — WASHINGTON (Reuters) – Treasury Secretary Henry Paulson said on Friday that the government was considering a $140 billion to $150 billion stimulus package, and swift action was needed to safeguard the economy from a downturn.

[…]

He declined to give specifics on the stimulus package under discussion, but said a significant part would be in the form of tax relief for consumers. [Paulson says mulling $140-150 billion stimulus plan. Reuters. January 18 2008][↩]

[2] — In 2001 — despite the thoroughness and general acceptance of these studies — Congress and the White House once again chose a one-shot tax rebate to deal with an economic slowdown in 2001.

To his credit, Treasury Secretary Paul O’Neill cautioned against the rebate. “I was here when we tried that in 1975, and it just didn’t work,” he said. “If we want to change consumption patterns, we need to make permanent changes in peoples’ tax burdens.” But President George W. Bush overruled his Treasury secretary and approved the rebate idea. Checks of $300 to $600 per taxpayer were sent out in the late summer. Contemporaneous polls by Gallup, Bloomberg and the University of Michigan all found that the vast bulk of consumers expected to save the money or use it to pay bills. Subsequent studies confirmed these forecasts.

In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn’t help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political — giving politicians a way of appearing to be doing something about the nation’s economic problems that is superficially plausible. [Feel-Good Economics. Bruce Bartlett. WSJ. January 19 2008][↩]

Categories
Politics & government

[1518] Of Ayatollah Huckabee lost

Mr. Mike “I-want-to-change-the-Constitution” Huckabee lost the South Carolina’s primaries. Just days before the South Coralina’s primaries, Huckabee said this (via):

I have opponents in this race who do not want to change the Constitution. But I believe it’s a lot easier to change the Constitution than it would be to change the word of the living god. And that’s what we need to do — to amend the Constitution so it’s in God’s standards rather than try to change God’s standards so it lines up with some contemporary view. [Huckabee: Amend Constitution to be in ‘God’s standards’. The Raw Story. January 15 2008]

Though it is hard to say how his call for God’s standard affected his odd of winning the primaries, I am sure we will find out soon. But why his loss in South Carolina is so important?

Mr. Huckabee’s loss in a Southern state with a strong turnout of religious voters was a setback to his campaign as it heads toward potentially less hospitable states. [McCain Has Big Win in South Carolina; Huckabee Falls Short. NYT. January 20 2008]

As for Iowa where he won earlier (before the Ayatollah expressed his desire to undo secularism in the US), his appeals to the Christian right might actually put the Catholics off:

One of the commenters to my post below suggested that Mike Huckabee was unlikely to do well among Catholics. Philip Klinkner (who is really blogging interesting stuff on the races) has some county-level data from Iowa suggesting that this is true. [Huckabee, Romney and Catholics. Crooked Timber. January 7 2008]

The Crooked Timber has graphics to show how Huckabee fared in Catholic-dominated countries in Iowa.

And yes, Ron Paul has outdone Giuliani for four out of six times now: Iowa, Michigan, Nevada, and South Carolina all prefer Paul to Giuliani. In Nevada, Ron Paul is second!

I am not the only one whom are excited of Dr. Paul’s consistent performance against Giuliani:

In case you’re wondering how fringe candidate Ron Paul has fared against “front-runner” Rudy Giuliani, here are the approximate popular vote totals for both candidates so far this primary season (including 93% reporting from South Carolina):
Paul: 105,848 votes
Giuliani: 60,213 votes [Go Ron Paul. Daily Kos. January 19 2008]

As a result so far, Paul has approximately 6 delegates behind him. Giuliani has only abot 2. The front runner is Romney with possibly 68 delegates.[1]

I used to have high hope for Giuliani but as time progressed and as I learned more about each Republican as well as Democrat candidate, it became clear that his position on the question liberty and security does not match mine. With other candidates possibly mirroring his more palatable positions, it was not hard to remove him from my list.

I know that Ron Paul has no chance of winning but I think, like all that support him, it is mostly about principles and issues rather than a bandwagon effect that plagues many observers and voters alike. David Brooks may have described many voters succinctly two days ago:

In reality, we voters — all of us — make emotional, intuitive decisions about who we prefer, and then come up with post-hoc rationalizations to explain the choices that were already made beneath conscious awareness. ”People often act without knowing why they do what they do,” Daniel Kahneman, a Nobel Prize winner, noted in an e-mail message to me this week. ”The fashion of political writing this year is to suggest that people choose their candidate by their stand on the issues, but this strikes me as highly implausible.” [How Voters Think. David Brooks. NYT. January 18 2008]

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[1] — See Results of the 2008 Republican presidential primaries at Wikipedia. [↩]

Categories
Economics

[1517] Of a basket of currencies please

When opining on the strength of the Malaysian ringgit, many implicitly use the US dollar as a benchmark. That has caused some people to overstate the relevance of trends generated by the two currencies to the Malaysian economy while missing out the bigger picture altogether.

The United States is an important export destination for Malaysian goods and this is why the MYR-USD exchange rate receives the special attention in the public sphere. However important it might be, trend associated with movement of the rate blurs out the actual meaning of changes of the rate.

There are a number of factors that affect a currency’s strength but essentially, it comes down to capital flow. An inflow strengthens the currency and an outflow does otherwise. The MYR has been strengthening against the USD ever since the pegging of the former currency to the latter was removed back in July 2005. Meanwhile, the USD has been slacking against various currencies, including against the MYR. If the MYR and the USD were the only currencies in the world, one would assume that capital is flowing from the US to Malaysia. The issue is that there are more than two countries in this world.

One will reach the same assumption, albeit wrongfully, if one concentrates on the MYR-USD exchange rate alone. Through that, it is easy to get a feeling that the MYR is appreciating in general. Coupled with the perception that a strong currency is a good currency — a strong currency is not necessarily a good thing; it depends on the composition of the economy; an export-oriented country would hate a strong currency — among lay observers of local economy and politics, it contributes to a kind of unfounded optimism.

It is unfounded because not all of the strengthening of the MYR against the USD is caused by attraction that the Malaysian economy creates. Part of it is contributed by uncertainties in the US economy which has nothing to do with the Malaysian economy. On top of that, not all of the capital that flows out of the US economy is flowing into Malaysia. There are other countries out there but yet, a lot of laypersons seem to overlook that fact.

The truth is that while the MYR has been strengthening against the USD, it has not really shown the same trend against our other major trading partners like Singapore and Japan. The USD on the other hand has been growing weaker against a majority of other currencies.

The USD can become weaker against the MYR if capital flows out of the US to a third country. In other words, the MYR can appreciate against the USD without the Malaysian economy doing anything positive. Indeed, with enough outflow from the US economy to a third country, the MYR could appreciate against the USD even when the Malaysian economy is bleeding to death!

So, I guess what I am trying to say is that please do not measure the strength of the MYR solely against just the USD and then make a conclusion about the Malaysian economy. Instead, take a basket of currencies or more precisely, currency of Malaysia’s main trading partners. The latter method will help anybody to arrive at a more accurate conclusion than the former method will ever allow.

Categories
Economics

[1516] Of stupidité

Hilarity of stupidity (via):

Did you hear the one about Amazon? It offered free shipping in France, got sued for it by the French Booksellers’ Union, and lost. Now it’s choosing to pay €1,000 a day rather than follow the court’s order. Ba-da-bing!

No, it’s not funny, but that’s because it’s not a joke. The Tribunal de Grande Instance (a French appeals court) in Versailles ruled back in December that Amazon was violating the country’s 1981 Lang law with its free shipping offer. That law forbids booksellers from offering discounts of more than 5 percent off the list price, and Amazon was found to be exceeding that discount when the free shipping was factored in. [Amazon’s free shipping costing €1,000 per day in France. Nate Anderson. ars technica. January 15 2008]

Protectionism is funny!