Naked Economics: Undressing the Dismal Science pdfdrive com
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Naked Economics Undressing the Dismal Science ( PDFDrive )
Act II. The global financial crisis was bad for the world and disastrous for
Iceland. Iceland’s banks suffered huge losses from bad investments and nonperforming loans. By the fall of 2008, the country’s three major banks were defunct; the central bank, which had taken control of the largest private banks, was technically in default as well. The New York Times reported a story in November 2008 that began, “People go bankrupt all the time. Companies do, too. But countries?” As the krona plummeted, the cost of all those consumer loans in foreign currencies skyrocketed. Think about it: If you borrow in euros, and the krona loses half its value relative to the euro, the monthly payment in krona on your loan doubles. Of course, many of the assets that Icelanders had purchased with those loans, such as homes and property, were simultaneously plummeting in value. Act III. The Icelandic krona lost half its value. The stock market fell by 90 percent; GDP fell 10 percent; unemployment hit a forty-year high. People were angry—just like in Argentina. One woman told The Economist, “If I met a banker, I’d kick his ass so hard my shoes would be stuck inside.” And she was a preschool teacher. 10 Even the Big Mac Index had a sad postscript in Iceland. In October 2009, Iceland’s three McDonald’s restaurants closed after becoming victims of the financial crisis. McDonald’s required that its Iceland franchises buy their food inputs and packaging from Germany. Because the krona had plummeted in value relative to the euro and because the government had imposed high import tariffs, the cost of these inputs from Germany roughly doubled. The owner of the Iceland franchises said that to make a “decent profit,” a Big Mac would have had to sell for the equivalent of more than six dollars—higher than anywhere else in the world and an untenable price for a country in the midst of a deep recession. McDonald’s closed its doors in Iceland instead. 11 The economic wreckage that results time after time as investors flee a country suggests an obvious fix: Maybe it should be harder to flee. Some countries have experimented with capital controls, which place various kinds of limits on the free flow of capital. Like many obvious fixes, this one has less obvious problems. If foreign investors can’t leave a country with their capital, they are less likely to show up in the first place. It’s a bit like trying to improve revenues at a department store by banning all returns. A group of economists studied fifty- two poor countries between 1980 and 2001 to examine the relationship between financial liberalization (making it easier to move capital in and out of the country) and economic performance. There is a trade-off: Countries that impose some kind of capital controls also grow more slowly. The Economist summarized the study’s findings: “An occasional crisis may be a price worth paying for faster growth.” 12 Okay, what if we all had the same currency? Wouldn’t that help avoid currency-related headaches? After all, Iowa has never had a financial meltdown because Illinois investors took their capital back across the Mississippi River. There are benefits to broadening a currency zone; this was the logic of the euro, which replaced most of the individual currencies in Europe. A single currency across Europe (and in the fifty U.S. states) reduces transaction costs and promotes price transparency (meaning that it’s easier to spot and exploit price discrepancies when goods are all priced in the same currency). But here, too, there is a trade-off. Remember, monetary policy is the primary tool that any government possesses to control the “speed” of its economy. A central bank raises or lowers interest rates by making its currency more or less scarce. Countries that share a currency with other nations, such as the European countries that adopted the euro, must give up control over their own monetary policy. The European Central Bank now controls monetary policy for the whole euro zone. (Obviously Louisiana and California do not have their own monetary policy either.) This can be a problem if one part of the currency zone is in an economic slump and would benefit from lower interest rates while another region at the same time is growing quickly and must raise rates to ward off inflation. We don’t really care about currencies per se; what we really care about is the underlying flow of goods and services. These trades across international borders are what make us better off; currencies are merely a tool for facilitating mutually beneficial transactions. In the long run, we would expect the value of the goods beneficial transactions. In the long run, we would expect the value of the goods and services that we send to other countries to be more or less equal to the value of what they send to us. If not, someone is getting a really bad deal. Even little kids trading snacks in the lunchroom recognize that what you give up should be worth what you get back. Except for the United States. We’re the guys in the lunchroom giving up liverwurst sandwiches and getting a turkey sandwich, plus chips, cookies, juice, and a peanut-free snack. The United States has been running large and persistent current account deficits with the rest of the world, meaning that year after year we are getting more goods and services from the rest of the world than we sell to them. (The current account measures income earned abroad from trade in goods and services, plus some other sources of foreign income, such as dividends and interest on overseas investments as well as remittances sent home by Americans working abroad.) How are we getting away with that? Might it be a problem in the long run? The answer to the second question is yes. The first question is more complicated. As noted in Chapter 9 , there is nothing inherently bad about a current account deficit, nor anything inherently good about a current account surplus; countries like Azerbaijan and Botswana were running large current account surpluses in 2017 as a percentage of GDP, but that does not make them economic powerhouses. Still, there is an unavoidable economic reality lurking here: A country running a current account deficit is earning less income from the rest of the world than it is paying out. Consider a simple example: If we buy $100 million in cars from Japan and sell them $50 million in planes, then we’ve got a $50 million current account deficit. The Japanese are not sending us an extra $50 million in merchandise because we’re friendly and good looking; they expect us to make up the difference. To do that, we have only a couple of options. One option is to sell our Japanese trading partners assets instead— stocks, bonds, real estate, and so on. For example, we might sell Japanese firms $25 million in Manhattan real estate and $25 million of equity in American firms (stocks). Now the ledger makes sense. Americans get $100 million of goods and services from Japan; in exchange, we send over $50 million in goods (the planes), and another $50 million in assets. That’s an even deal. It comes with a price, however; the assets that we’re giving up (real estate and stocks) would have generated income for us in the future (rents and dividends). Now that income will go to our trading Download 1.74 Mb. Do'stlaringiz bilan baham: |
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