EM Currency Collapse Will Have Deflationary Impact On Us

Recently, a number of emerging market currencies, led by the Argentine peso. but also including for example the South African rand, the Turkish lira and the Russian ruble have dropped sharply in value against the U.S. dollar, the euro and most other rich country currencies. The effect of this will be both inflationary and deflationary.

It will be inflationary to the emerging economies as the drop in their currencies will push up import prices and local currency commodity prices, while raising nominal income for exporters. It will be deflationary for us, as the lower emerging economy currencies will lower our import prices and commodity prices for us, while reducing nominal income for exporters.

This is similar to how "Abenomics" while achieving its goal of ending price deflation and creating inflation, has had a deflationary effect on the rest of the world.

Clone Of The Attack

This is obviously very old, but still funny as the Iraq war still haunts us.  Remember the movie Star Wars Episode 2: Attack of the Clones? Here is the official movie poster for that movie:

And here is a parody of the poster that I just found, meant to ridicule the people behind the second attack with Anakin Skywalker replaced by Bush Junior, Padmé Amidala with Condoleezza Rice, Yoda with Dick Cheney, Obi-Wan Kenobi with Bush Senior, Mace Windu with Donald Rumsfeld, R2D2 & C3PO with Colin Powell and finally the lone villain in the poster, Jango Fett replaced with Saddam Hussein.

Most Americans Still Believe There's A Recession

Though data shows that the recession ended years ago, and that average real income has in fact now risen above its pre-recession peak (assuming the government estimate of inflation is correct), some 74% of Americans still thinks that it is a recession.

This likely in part reflects the increase in inequality (with most income gains going to the top 1%) and in part the fact that the thoroughly "chain linked" and  "hedonically adjusted" government estimates of inflation is lower than ordinary people's perception of how their cost of living have changed.

Ukraine Should Be Split In Two

Ukraine, particularly the capital Kiev, continues to be tormented with clashes between protesters and the police.

These protests started after Ukraine's government decided to reject an agreement with the EU and instead seek closer ties with Russia.

In most Western media outlets, this is portrayed as a struggle between the people and a dictator allied with Vladimir Putin. However, what they forget is that while, President Yanukovich  somewhat authoritarian, he is supported by a large part of the population.

More specifically, Yanukovich is very popular in the eastern and southern parts of the country, but very unpopular in the western and north central parts of Ukraine. This geographic divide is illustrated by this map showing his support in different parts of Ukraine (for a larger version of the image click on it) in the latest presidential election.

Yanukovich is supported by a majority in blue areas, and the darker the blue color is the larger the majority is while his opponent was supported by a majority in yellow and red areas, with the strongest majority being in the dark red areas.

The pro-Yanukovich areas are essentially the pro-Russian parts of Ukraine. Here the Russian language is largely prevalent with a significant part of the population considered to be "ethnic Russian". These regions also have strong trade ties with Russia.

The anti-Yanukovich areas are thus more or less anti-Russian. They speak only the Ukrainan language and have little or no ties with Russia-and wants to keep it that way,

If Yanukovich prevails, the pro-Russian parts of Ukraine will be pleased and the anti-Russian will feel oppressed. If the protesters wins, the anti-Russian parts will be pleased and the pro-Russian parts will feel oppressed.

The only sensible solution for this dilemma is to divide Ukraine. The western and north central parts will then be able to create a Western oriented state which is linguistically entirely Ukrainian while the southern and eastern parts can either merge with Russia or create a linguistically Russian state allied with Russia.

This solution isn't entirely unproblematic as there are areas which are themselves divided between anti- and pro-Russian supporters and as many Ukrainian nationalists insists that the country shouldn't be divided. But the current structure which will leave one half of the country feeling oppressed by the other half will continue to be a disaster.

Fictional Bad Guys Are Implausibly Lousy Shots

One really annoying thing in many action or science fiction movies or TV series is that the bad guys are always really lousy shots, at least when fighting the main characters. The most famous example of this was how, even after Obi-Wan Kenobi in the first Star Wars-movie ( Episode IV: A New Hope) said "these blast points are too accurate for Sand People. Only Imperial Storm Troopers are so precise", the storm troopers were consistently unable to ever hit Leia, Luke, Han Solo or Chewbacca even though they had the chance repeated times often just from a 10 meter range or so.

Here is the Family Guy parody of this phenonenom.


And here is an example of what's parodied, at 1:54 to 2:12 in the clip. Here we have several elite mercenaries, shooting at Bruce Willis' character from a distance of just a few meters/yards with sub machine guns for a time period of 18 seconds, and they all miss! It's almost as if the makers of this movie wanted this scene to be a parody.

How Unlikely Is The EU To Erect Trade Barriers In Case Of Brexit

Ford Motors has threatened to end its car production in Britain if it leaves the EU. The stated reason is that they fear that cars produced in Britain could face tariffs when exported to the EU.

Many people dismiss this fear in the ground that Britain is the biggest export market for the rest of the EU, meaning that the EU would have too much to lose to start a trade war. However, while that makes it indeed unlikely, it doesn't mean it can be ruled out entirely.

hat is beacuse first of all, while the EU would lose from trade restrictions, Britain would lose a lot more simply because the rest of the EU has an economy that is about 5½ times bigger, meaning that British-EU trade is relatively much more important to Britain than to the EU.

But if the EU nevertheless loses why would it want to erect trade barriers? Well, one reason would be to punish Britain and set an example to deterr for example Sweden from following its example.

Furthermore, it should be noted that if Britain leaves, then the balance of power in the EU will shift to France and other more protectionist countries.

It is despite the above more likely than not that free trade between Britain and the [rest of} EU will prevail. But it does mean that trade restrictions can't be ruled out entirely.

National Socialists Would Just Love That

An Israeli lawmaker wants to ban the use of the word "Nazi". That's a pretty odd and stupid proposal for several reasons especially considering that it has an anti-Nazi motive. Because the thing is, the people we usually refer to as "Nazis" don't use that word to describe themselves and consider it derogatory. So they would just love for that word to be banned. They instead use the word "National Socialist". Remember, the official name of Hitler's party was Nationalsozialistische Deutsche Arbeiterpartei (NSDAP), which translated into English is "National Socialist German Worker's Party". And of course, as we all know, "Nazi", besides referring to the National Socialist ideology and things associated with it, is also used as a common derogatory epithet for various non-National Socialist political opponents or ideas that the people who use the term don't like.

Australia's Population Adjusted Recession Continues

The number of employed in Australia rose 0.5% in the year to December, the lowest gain in several years. Still, it was a gain, so that still means progress, right? Wrong! Australia's population is growing at a rate of 2% per year, mainly due to a high level of immigration. Given this, a 0.5% increase in the number of employed implies a 1.5% drop in the employment rate. And indeed, the same report shows that the unemployment rate rose 0.5 percentage points, even as the participation rate fell 1%. In population adjusted terms, it thus seems clear that Australia is in a recession.

The Myth Of Israeli Dependence Of U.S. Aid

One myth, prevalent mainly among various Israel-haters, but also among some of its AIPAC-affiliated supporters is that Israel is dependent on U.S. aid, and that an end to that aid, would doom, or at least greatly weaken Israel.

First it must be noted that the amount Israel receives has stayed virtually unchanged in nominal terms since the late 1990s at roughly $3 billion per year, while Israeli GDP at the same time has increased in nominal terms from about $100 billion per year to $300 billion per year.

If Israel was able to withstand a two thirds reduction in the relative importance of aid without trouble, then surely the removal of the remaining third shouldn't be much trouble.

Secondly, it should be noted that since 2007 Israel receives no economic aid, no cash trasfers, at all from the U.S. government. Aid to Israel instead consists entirely of subsidies of weapons purchases, almost all of which is purchased from U.S. weapons manufacturers. So, "aid to Israel" is almost as much a subsidy of U.S. weapons manufacturers as of Israel.

So, if hypothetically, aid to Israel was ended, this would mean that Israel's defence budget would have to be increased somewhat as weapons purchases would be somewhat more expensive. But as there would no longer be a requirement that most weapons must be purchased from the U.S., this would stimulate domestic weapons production, and perhaps make it profitable for Israel to develop its own fighter jets, instead of purchasing various U.S. made "F" (-15, -16, -18, -35)  fighter jets.

The benefits to domestic weapons production perhaps wouldn't fully compensate for the higher cost of military spending, but to a large extent it would. So the net loss for Israel for cancelled aid would at most be a few tenths of a percent of GDP. Perhaps not positive, but definitely manageable.

We're Not Seeing A Lot Of Progress Here

The latest U.S. employment report, or more accurately the household survey part of it, was actually stronger than many people thinks it was. If you look at the prime age (25 to 54) employment rate*, did in fact increase 0,1 percentage points, from 76.0% to 76.1%, as the drop in the unemployment rate overwhelmed the effect of the drop in the participation rate.

However, though the monthly change was stronger than many people think, the yearly change is weaker than what many people think.

Here is the December data for the latest 11 years:

2003 78.8
2004 78.9
2005 79.3
2006 80.1
2007 79.7
2008 77.6
2009 74.8
2010 75.0
2011 75.4
2012 75.9
2013 76.1

As you can see, it dropped from a high of 80.1% in 2006 to 74.8% in 2009. After having increased by 0.4 and 0.5 percentage points in 2011 and 2012, it then increased by a mere 0.2 percentage points in 2013. So, after four years less than a fourth of the drop has been recovered and  the already slow rate of recovery slowed further in 2013.

*= The prime age employment rate is in my view the best gauge of labor market strength, since unlike the official unemployment rate it isn't distorted by the hidden unemployment that is represented by the long-term unemployed dropping out of the work force as the many rejections have led them to believe that there is no point in applying for jobs, and unlike the 15+ employment rate, it isn't distorted by demographic shifts between age groups.

More Al-Qaeda In Iraq= No More Cheney In Politics

That the war in Iraq was a big mistake has been obvious for many years now, but in case anyone still doubts, the news a few days ago that al-Qaeda warriors have taken over large parts of the Sunni Arab parts of Iraq should disspell those doubts. The increased power of al-Qaeda that the ouster of Saddam Hussein's regime meant is ironic given how advocates of the war often framed this as a reponse to al-Qaeda's terrorist attacks on 9/11 2001, attacks that Saddam Hussein had nothing to do with. The failure of the Iraq war is arguably one of most important reasons why Liz Cheney, felt compelled to withdraw from the Senate race in Wyoming as her father Dick Cheney was one of the most passionate supporters of the war within the Bush administration. Children should of course not be made responsible for their parents mistakes just because they're their offspring, but it is fair to make that association if they endorse the ideology behind these mistakes, and Liz has endorsed her father's neoconservative foreign policy ideology.

Ideology Trumps Economics For Some On Minimum Wage Issue

As Obamacare remains largely unpopular and partially dysfunctional, Democrats have decided they should change the subject by bringing up the issue of raising minimum wages, an issue where polls show they have strong popular support.

An increase in the federal minimum wage of $7.25 isn't going to happen as long as Republicans control the House of representatives, but many states and cities have decided to implement higher minimum wages, and Democrats have organized initiatives to raise them in even more states through referendums.

The economics of a higher mimimum wage is very clear: it will mean that some low paid workers will get raises while others will get pink slips (be fired). Theory doesn't tell us the exact proportion of low paid workers who will get higher pay and workers who will get no pay, but it does say that there will be a mix of the two.

Interestingly, both some of the opponents and some of the advocates of a higher minimum wage lets what seems ideologically convenient trump what theory says.

Some opponents of a higher minimum wage argue that the only effect is to reduce employment and that no workers will get higher pay. Their argument is that  a minimum wage doesn't compel employers to employ at higher wages, it simply forbids employment contracts with lower pay, and if those employment contracts are destroyed then there won't be any employment contracts.

But that is of course false, because many (but not all) contracts will be renewed but at the higher wage level mandated by minimum wage laws. The idea that all will lose their jobs seems to be based on the idea that marginal productivity in the sense of the extra net revenue that the employees help facilitate is necessarily equal to the existing wage level. But the existing wage level is in fact often lower, sometimes significantly lower, than marginal productivity, as wages are also influenced by what options the employee and employer have to each other. If the employee can't find a better position elsewhere and if the employer have a large number of people to choose from then wages will be significantly lower than the extra revenue that the employee help create.

A minimum wage will in such a situation raise wages for employees (at the expense of employers' profits) as long as it remains below the level where the business becomes loss making.

Many advocates of higher minimum wages however make the opposite but related mistake of assuming that all a minimum wage does is raise wages for low paid workers.

That is because a mimimum wage will in some cases be higher than marginal productivity for workers, and in such cases the employer will fire the workers.

Since there is no universal level of marginal productivity any attempt to benefit workers at the expense of employers will mean that some workers will be unprofitable for the employer, and result in more unemployment.

Presumably, many leftists will think that is a price worth paying for redistributing income from capitalists to the workers who keep their jobs, but if so they should openly say "getting some workers unemployed is worth it to help other workers receive better pay at the expense of their employers", and not pretend that it will have no negative effect on the number of employed.

How Not To Defend Free Markets

Bret Stephens at the Wall Street Journal, tries to argue against efforts of increased government redistribution by saying that in nominal terms, incomes of poor Americans have risen sharply since 1979.

It should be obvious that this is faulty reasoning. If nominal income change was equivalent to genuine economic progress, then Weimar Germany in 1923 and Zimbabwe in 2009 are the two biggest success stories in modern history., so it is all too easy for leftists to present this as evidence of economic ignorance of free market advocates.

There are by the way many valid arguments against economic redistribution through taxation and spending even if it is established as a fact that inequality in America has increased since 1979 (which i by the way do think is an established fact). That means more specifically pointing out the extent to which this increase is due to government interventions and that the best way to deal with it is by abolishing these interventions, and also pointing out that increased inequality is not necessarily a problem.

This reminds me of a debate i had with a reader on my Swedish language blog, who insisted that the proper way to gauge politicians is by looking at nominal change of government spending during their terms in office . Presumably, he thought (maybe subconsciously ) that by presenting the change in government spending as more expansionary than it actually was, then that would establish a standard which would make politicias hold back more on spending.

But using misleading standards is not a good strategy. That is because even if you have a dubious "the end justifies the means" ethics regarding such matters, it won't work, because then you give your opponents the advantage of representing the truth, something they will use to defeat you unless they have really stupid representatives. And that is not something I think we should rely on as a strategy.