Who Stole the Punch?

As a follow/summary to the conversation I had with Professor Dickovick after class today, I'll first restate the main question: What should the role of central banks be with regard to interest rates following a bubble-burst? The natural thinking is that interest rates should be lowered, allowing for freer capital flows, which would stimulate the economy.

I proposed in class that after bubbles burst is not the time to lower rates, as that encourages banks to add more risks to their balance sheets, which is probably the reason you got into this whole mess anyway. However, after talking with Professor Dickovick, I realized that the reality is a bit more nuanced. Following a crisis, a credit crunch usually ensues. This freezes lending and investment, contracting the economy. Thus, even if the central bank lowers interest rates, people will be less likely to borrow money. However, as the economy improves, people are more willing to take on risk and borrow money. This is when the central bank needs to step in and raise rates. There is a saying that goes something like "a central bank needs to be the person that takes away the bowl of punch at the party," meaning that the bank needs to raise rates to avoid bubbles. This is to ensure sustainable growth, not a "bubble-cycle" of over-borrowing followed by a credit crunch.

Obviously, the above is much more nuanced in practice, but I think it's important this argument is made in whatever form.

The Saga Continues

If this section of IPE were a story, one of the main elements would be China's currency valuation and its affect on international trade. We have mostly been talking about China's currency in relation to US trade and its current account deficit, yet another (more?) important story is China's currency in relation to its Asian neighbors. The Chinese government has worked hard to keep the Yuan tied to the dollar, meaning that the Yuan has been steadily falling in recent months in comparison to other currencies in Asia. As we've discussed in class numerous times, this makes Chinese goods cheaper relative to its neighbors. As the economies in Asia are largely export-based, more expensive goods is obviously bad for their respective economies.

In response, the central banks have been buying up dollars and building up their foreign reserves. The long-term story here is that Asia is viewed by many as the next global financial center, and devaluing a currency to promote exports is not a long-term growth strategy. Furthermore, one wonders if the strategy that "there's no such thing as too much reserves" is accurate or not. Either way, countries like Singapore and South Korea are stuck between the proverbial rock and hard-place, and it seems that they may lose money either way.

Iranian Nuclear Talks- Kasparov Edition

Continuing the discussion about the Iranian nuclear deal, Mondays WSJ had an op-ed written by Garry Kasparov, the chess champion that ran for Russia's presidency, arguing the true intentions of the Russian government compliance in the talks. Mr. Kasparov argues that the Russian governments primary intention is to inflate oil prices, and instability within the Middle East provides such inflation. Applying economic sanctions to Iran provides Russia with the instability, and therefore price increase, it seeks.

The article generally talks about US-Russia relations, especially the differing approaches by each country. While the US has made repeated concessions to Russia, such as the nuclear defense system previously noted in this blog, Russia, according to Mr. Kasparov, only works with Western powers on human rights and democracy when it increases the wealth of the government and oil oligarchs. As such, the US must take a harder line when dealing with Russia.

It must be noted that Mr. Kasparov comes from a decidedly biased point of view. However, any dissenting views coming from Russia are refreshing, as so little dissent exists, or more truly, is allowed.

FP- Oil Issue

For those of you interested in oil politics, the Sep/Oct edition of Foreign Policy is a must read. Inside are 6 or so articles on a variety of topics related to oil and its geopolitical role and future. I might include some commentary on a specific article in the future, but for now be content with this advertisement.

Iranian Nuclear Talks

Haven't posted in a while, as midterms and such have been taking their toll. However, a major ongoing story is the talks between Iran and Western Powers, specifically the US, France, and Russia. The controversy is over Iran's uranium and its quest to become a nuclear power.

Iran currently has a stock of low-enriched uranium (LEU), some of which Iran has already agreed to send to Russia and France to convert the uranium so it cannot be used for weapons, and shipped back to Iran for medical research. Current talks seek to remove that majority of the LEU for similar purposes, although Iran has announces its intentions to continue its enrichment program it no agreement is made.

Similarly, the threat of "sanctions" has been placed on the table, the geopolitical catch-all threat, if Iran does not announce its intentions to cease uranium enrichment by years end. The manner in which this drama unfolds is very important for the future of world politics.

Iraq Oil Licenses

Another Economist article (I really need to broaden my online news sources), this time dealing with Iraq and its unwillingness to offer foreign oil companies licenses to drill in their fields. Addressed in Stiglitz, the so-called resource curse has been a major issue in IPE and development in the post-WWII world.

The article outlines the Iraqi governments attempts to avoid the pitfalls associated with resource cursed countries, such as offering drilling contracts that do not adequately compensate the host country. The government will auction off several of its oil fields in December to foreign companies, a long-awaited event for these companies. However, the government only offered $2 a barrel in a June auction, compared to the $4 a barrel the oil companies sought.

The current structure of state-run oil production in Iraq reflects similar resource cursed countries- a lack of central direction and plentiful infighting between the separate subsidiaries of the government. The government hopes to consolidate all oil production under one national company, yet making this a reality is still a long way off.,

Most troubling to the foreign companies is the political wavering by Iraq's new parliament. Whenever an election looms, the MPs feel "obliged to beat a nationalist oil drum [and] are unable to tell voters that the country will earn more from its oil only if foreigners are drawn in." The government's wet feet are indeed costing them a lot of money, as the US Department of Energy estimates that there are 41 million barrels of oil in Iraq's 10 oil fields, worth roughly $3 trillion at today's price.