Fausta's Blog

American and Latin American Politics, Society, and Culture

March 30, 2013 By Fausta

Peru’s definitely not Cyprus

Last Tuesday in Rick Moran’s podcast I mentioned that the flight of capital from the EU might make emerging markets very attractive.

Well, look at Peru:
Peru intensifies currency fight (emphasis added)

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For the eighth time in 10 months, Peru’s central bank has raised deposit requirements on dollar-denominated accounts to stem the flow of hot money into its fast-growing economy and dampen currency appreciation.
With the sol approaching a 16-year high, Peru’s central bank said that as of April 1, the reserve ratio will rise 0.25 percentage points. The bank, which has ruled out Brazilian-style capital controls, has also been aggressively buying dollars in the spot market to slow the trajectory of the sol.

So far, its strategy has worked, with the sol weakening 1.33 per cent against the dollar this year, after appreciating 5.7 per cent in 2012.

The Peruvian bank’s struggle to rein in its currency is shared by fast-growing neighbour Colombia, which last week said it was willing to double its spending on dollars, to $10bn, this year to take some of the steam out of the peso.

Both countries are enjoying the fruits of years of prudent economic management – but rapid economic growth and low inflation have come hand-in-hand with the kind of current appreciation that makes exporters squeal.

Hmmm. . . Prudent economic management.

Are you listening, Paul Krugman?


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Filed Under: Colombia, economics, economy, Latin America, Peru, trade Tagged With: currency, Fausta's blog

March 28, 2013 By Fausta

Venezuela: Maduro vs Lechuga

If you disseminate currency exchange information on the internet, Maduro will have you jailed and indicted:
Venezuela interim president Maduro takes on currency exchange website

Video in Spanish,

Venezuela’s interim president, Nicolás Maduro, came out Tuesday fighting the acute depreciation of the bolivar against the U.S. dollar by ordering the indictment and jailing of the creators of lechuga.com, a popular website that thousands of Venezuelans consult everyday to check currency exchange quotes in the parallel market.

Maduro issued the order as part of his government’s effort to contain the impact on the economy of the two back-to-back devaluations of the Venezuelan currency. The first one — of 32 percent — was announced on Feb. 7, when the exchange for special sectors went from 4.30 bolivars per dollar to 6.30 bolivars. The second one took place five weeks later, with the decision of auctioning foreign currency for another group of sectors.

Of course, Maduro blames the “capitalist oligarchy” for the state of the economy, rather than the disastrous Chavista mismanagement. Last month the annual inflation rate rose to 22.8%, the highest in our hemisphere.

Lechuga.com is gone, along with its Twitter and Facebook accounts. As of the writing of this post, no one had been arrested.

DollarToday, however, is still up.

Related:
The Puzzle of SICAD: First Auction Result Above Bs. 10 Per US$

Venezuela Stays Mum on Rate at Auction

Le maduro la lechuga…

UPDATE:
Linked by Hot Air. Thank you!


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Filed Under: Venezuela Tagged With: bolívares, currency, Fausta's blog, Nicolas Maduro

October 16, 2010 By Fausta

Monetary policy as a national priority

In today’s Wall Street Journal, Judy Shelton interviews Nobel Prize winner Robert Mundell, best known as “the father of the Euro”:
Currency Chaos: Where Do We Go From Here?
‘The most important initiative you could take to improve the world economy would be to stabilize the dollar-euro rate.’

The article on line is only available by subscription, but you can also find it in today’s print edition. Here’s a snippet”

“The Fed is making a big mistake by ignoring movements in the price of the dollar, movements in the price of gold, in favor of inflation-targeting, which is a bad idea. The Fed has always had the wrong view about the dollar exchange rate; they think the exchange rate doesn’t matter. They don’t say that publicly, but that is their view.”

“Well,” I counter, not particularly savoring the role of devil’s advocate, “I suppose Fed officials would argue that their mandate is to try to achieve stable prices and maximum levels of employment.”

Mr. Mundell looks annoyed. “Well, it’s stupid. It’s just stupid.” He tries to walk it back somewhat. “I don’t mean Fed officials are stupid; it’s just this idea they have that exchange-rate effects will eventually be taken into account through the inflation-targeting approach. In the long run, it’s not incorrect—it takes about a year. But why ignore the instant barometer that something is happening? The exchange rate is the immediate reaction to pending inflation. Look what happened a couple weeks ago: The Fed started to say, we’ve got to print more money, inflate the economy a little bit. The dollar plummeted! You won’t get a change in the inflation index for months, but a falling exchange rate—that’s the first signal.”

Clearly on a roll, I press a bit. “You mentioned gold?”

‘The price of gold is an index of inflation expectations,” Mr. Mundell says without hesitation. “The rising price of gold shows that people see huge amounts of debt being accumulated and they expect more money to be pumped out.” He purses his lips. “They might not necessarily be right; gold could be overvalued right now.”

Sensing that the soup is getting cold, I decide to cut to the chase: “What would be your winning formula today? What advice would you give to Washington that would help turn around our moribund economy?”

He pauses to think, but only for a moment. “Pro-growth tax policies, stable exchange rates.”

Neither of which the politicians in Washington or the guys at the Fed are doing. In fact, Ben Bernake didn’t even mention the effect on his inflationary proposal on the exchange rates and the world’s economies.

It wouldn’t surprise me at all if the thought didn’t even cross his mind.

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Filed Under: business, economics, economy Tagged With: currency, Euro, Fausta's blog, Robert Mundell

March 18, 2010 By Fausta

Trade AND currency war with China?

Oh lordy. That would be the worst of both worlds.

The Wall Street Journal has a must-read on the subject,
The Yuan Scapegoat
The U.S. establishment flirts with a currency and trade war with China.

The battle concerns China’s decision to peg its currency, the yuan, to a fixed rate of roughly 6.83 to one U.S. dollar. To hear the American political and business establishment tell it, this single price is the source of all global economic problems. The peg keeps the yuan “undervalued” in this telling, fueling China’s exports and harming the U.S., Europe and everyone else. If the Chinese would only let the yuan “float,” it would soar in value, China’s export advantage would fall, and the much-despised “imbalances” in global trade would end.

President Obama has picked up this theme, calling last week for Beijing to adopt “a more market-oriented exchange rate” that “would make an essential contribution to that global rebalancing effort.” Less diplomatically, 130 Members of Congress sent a letter to Treasury this week demanding that unless China lets the yuan rise in value, the U.S. should impose tariffs on Chinese goods. Just what the world needs: a trade war.

At the core of this argument is a basic misunderstanding of monetary policy. There is no free market in currencies, as there is in wheat or bananas. Currencies trade in global markets, but their supply is controlled by a cartel of central banks, which have a monopoly on money creation. The Federal Reserve controls the global supply of dollars and thus has far more influence over the greenback’s value than any other single actor.

A fixed exchange rate is also not some nefarious economic practice rare in human affairs. From the end of World War II through the early 1970s, most global currency rates were fixed under the Bretton-Woods monetary system created by Lord Keynes and Harry Dexter White. That system fell apart with the U.S.-inspired inflation of the 1970s, and much of the world moved to “floating rates.”

But numerous countries continue to peg their currencies to the dollar, and with the establishment of the euro most of Europe decided to move to a fixed-rate system. The reason isn’t to get some trade advantage against their neighbors but to gain the economic benefits of stable exchange rates—and in some cases a more stable monetary policy. A stable exchange rate eliminates a major source of uncertainty for investment decisions and trade and capital flows.

The catch is that under a fixed-rate system a country yields some or all of its monetary independence. In the case of euro-bloc countries this means yielding to the European Central Bank, and for dollar-bloc countries to the U.S. Federal Reserve.

This is what China has done with its yuan peg to the dollar. By maintaining a fixed yuan-dollar rate, China has subcontracted much of its monetary discretion to the Fed in return for the benefits of exchange-rate stability. For more than a decade, this has served the world economy well, leading to an explosion of trade, cheaper goods for Americans that have raised U.S. living standards, and new prosperity for tens of millions of Chinese.

Read the entire article, with special attention to how a market solution may be the answer to the problem,

China’s build-up in dollar reserves is contributing to the world’s anger at China, and it represents a huge misallocation of global resources. Instead of letting its dollar reserves find their best private investment use, China uses them to buy U.S. Treasury bills or Fannie Mae securities.

One solution would be to make the yuan convertible, and let capital and trade flows adjust through private markets rather than the Chinese central bank. This is how Germany recycles its trade surplus. A one-time small revaluation to, say, 6.5 yuan to the dollar accompanied by convertibility would help with global adjustment while avoiding the perils of Japan-like deflation.

The Chinese government resists open capital markets because it fears less political control. At least at first a convertible yuan might also lead to a surge in capital outflows from China as Chinese companies and individuals diversified their currency holdings and investments. But over time, and probably quickly, markets would adjust and reach a new equilibrium. Convertibility would also increase the domestic pressure for China to further liberalize its financial system.

This is where the U.S. should put its diplomatic pressure, rather than on the exchange rate. Even better would be a joint U.S. Treasury-Chinese declaration on behalf of such a policy shift, which would give credibility to the new monetary arrangement.

It would be interesting to see the effect of a surge in capital outflows from China on the economies of our hemisphere, since the Chinese have been investing heavily in producers of raw materials, mines, and commodities. The dangers of volatility and political risk are holding back a lot of investments, but would the increase in outflow make investors less risk-adverse?

Either way, the answer does not lie in Keynesian-type solutions.

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Filed Under: China, trade, USA Tagged With: currency, Fausta's blog, John Maynard Keynes, yuan

January 11, 2010 By Fausta

Chavez devalues the currency: 15 Minutes on Latin America

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In today’s podcast at 11AM Eastern,
Chávez Devalues Currency Amid Oil Fall
Following the announcement, he stated that the military will monitor prices, and threatened to expropriate business that raise prices after the devaluation, in spite of the fact that the devaluation means that

45,9% de los productos adquiridos fuera del país a 2,60 bolívares por dólar ­correspondientes a alimentos, medicinas, algunas remesas y maquinarias­ estarán sujetos a una inflación que no estará por debajo de 20,9%. El restante 54,1% de las compras en el exterior, que se realizan a través de Cadivi, presentarán alzas de precios superiores a 100%.

45.9% of the products coming from outside the country at 2.60 bolívares per dollar corresponding to medicines, foods, some remittances and machinery will be subject to at least 20.9% inflation. The remaining 54.1% of import purchases, which are done through Cadivi, will have price raises of 100%.

The announcement from last Friday evening, which was not made during Chavez’s cadenas, created chaos in Caracas.

Miguel Octavio is Looking beyond the devaluation in Venezuela (Or trying…) and foresees another devaluation next year:

Let me explain. Let us assume that oil holds up and PDVSA sells the Central Bank for example US$ 30 billion. PDVSA will get some Bs. 120 billion to spend. This means that monetary liquidity will grow by a similar amount more or less. That represents an increase of 50% in M2, i.e. even if this money does not multiply, like it will, but let’s keep the argument simple. This means that by December monetary liquidity will reach Bs. 360 billion. Assume that the Central Bank will save US$ 8 billion of the US$ 30 billion, international reserves will reach US$ 36 billion.

This means that for each 10 Bs. in circulation in Venezuela there will be one US$ in the Central Bank. In contrast, today, before Chavez removes the US$ 8 billion, the equivalent number is 6.55 Bs. per $ and in a month it will become Bs. 8.24 per $. Well, as you can see this represents too many Bolivars searching for too few dollars, much like today. There will be 50% (it is actually more, but who cares?) more Bs. in December than yesterday. This will drive inflation and devaluation, as simple as that.Nobody seems to have told Hugo, in contrast with Argentina, where a Court has voided a decree to use international reserves to pay debt and stopped the firing of the President of the Central Bank by Mrs. Kirchner over the issue. Gee, if Chavez had done that with reserves, Venezuela would have no international debt by now, but Argentineans realize it would debase the currency and create inflation, precisely what nobody seems to have explained to Hugo.

Adding to the problem is that now there are two official rates, something Venezuela did back in the 1980s.

WSJ: Venezuela Devaluation Helps Chavez; For Others, It’s Unclear
Bloomberg: Venezuela Bonds Rise to 3-Month High After Chavez’s Devaluation
Reuters: Colombia fears pain from Venezuela devaluation
* Colombia-Venezuela trade already hurt by diplomatic spat
* Venezuela’s Friday devaluation makes imports expensive
* Bi-lateral commerce problems weigh on Colombia’s economy

Spain’s oil company Repsol announced that Spanish businesses (among them Mapfre, BBVA, and Telefónica) will lose US$1.4 billion from the devaluation. Spain’s foreign minister hastened to deny any effect of the devaluation “on Spanish interests.” The devaluation erased more than $1 billion in profits Telefonica has locked up in the country.

For more on the devaluation, go to Miguel’s blog, The Devil’s Excrement, and read on.

The Carnival of Latin America will be up later today.

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Filed Under: business, Communism, economics, Hugo Chavez, Venezuela Tagged With: currency, devaluation, Fausta's blog, trade

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