The government of Zimbabwe announced last week that it will issue a Z$100 trillion note, necessary because annual inflation is above 200 million percent.  This is an almost incomprehensible number:  it means that in a single day, prices can increase by more than 1,000%.   It’s almost impossible to have a functioning economy under these circumstances.  And it’s very difficult to stop the spiral of hyperinflation because it hinges on people beginning to regain faith in the value of the currency, and not demanding exponentially more notes for every simple business transaction.  To put it bluntly, they have to believe that a Zimbabwe dollar is worth more than say, a bubble-gum wrapper.   Or more precisely 100 trillion bubble gum wrappers.  And they have to accept these nearly worthless notes as a currency of exchange, rather than demanding dollars or bubble-gum wrappers.

Brazil, which suffered from hyperinflation throughout the late 1980s and early 90s, tried a series of failed plans to fight inflation: the Cruzado Plan (1986), the Bresser Plan (1987), the Summer Plan (1989) and several others plans that faded into anonymity without names that can be written in upper-case letters.   The government finally managed to turn around the economy with the Real Plan of 1994, bringing down inflation from nearly 2,000% to less than 10% in several months.  Fighting hyper-inflation is a bit like winning a fight when your outnumbered – it’s unclear exactly how you win but you definately don’t come out unscathed.

In fact, it’s so difficult to fight hyperinflation that you almost need a “secret plan” to do it.  At least that’s what Josh Lyman, Deputy Chief of Staff for the imaginary Bartlet Administration, found out.  And while President Bartlet wasn’t crazy about the plan, it sounds like just the sort of conspirational thing that Mugabe would be into. ..


Globalisation is…

January 15, 2009


… My Italian husband making me tacos for dinner in London. 

When the US Sneezes…

January 15, 2009

It’s the cold and flu season in London: my son has been battling a cough and related ailments for what seems like the entire winter, on and off.  It’s also cold and flu season in the international economy, and the US credit crisis is contagious.

As I’ve written before, the claims that contagion is a thing of the past – that economies have “decoupled” or that international investors had become more sophisticated and would not pull their investments from unrelated developing economies at the first sign of a sniffle elsewhere –  is unrealistic.  The old maxim, “when the US sneezes, the world gets a cold,” is looking even more true now than it did in January 2008.  The credit crisis has created debt and exchange rate concerns for a number of countries in developed and developing economies: Iceland, Hungary, Argentina and Brazil in addition to the UK and other Western European states.

That contagion is still with us is the bad news.  The worse news is that there are new transmission mechanisms between developed and developing countries to spread the economic malaise. In the past decade, remittances – money sent by workers in one country back to their home countries – have become an increasingly important part of flows of development finance.  Mexico, for example, received $20 billion dollars of remittances in 2005.  That was more than the total inflows of foreign direct investment in the economy by some margin (the World Bank reports that in 2003, remittances were 125% of FDI).   In 2008, remittances were Mexico’s second largest foreign exchange earner (after exports of oil).  While development specialists have argued about whether remittances are pro-developmental (i.e. whether the money goes to the poorest and is used to improve livelihoods), the fact is that they have became a major source of income for people living in developing countries with high levels of emigration.

But as the US economy slows down, so does the flow of remittances.  The Mexican Central Bank announced this week that remittances fell by 2.0% last year, the first fall ever recorded, and expectations are that remittances will fall another 2.5% in 2009.    Declines in remittances from low-skilled / semi-skilled immigrants might be even higher than the average as many of the industries in which they work will be strongly affected by the crisis: domestic service (people cut back on nannies, cleaners and other additional staff when times get bad), restaurants, construction, etc.   As low-skilled immigrants are likely to have left the poorest families back home, this is doubly bad for development.

The FT reports an interesting series of knock-on effects in the state of Michoacán, Mexico: the use of traditional medicine has increased as people have less money to pay for Western-style health care.  While this might not help to cure the contagiousness of the credit crisis, it could be of some use in curing my son’s cold…

Economic Whiplash

January 14, 2009

Something strange happened to the global economy.   If I had fallen into Sleeping Beauty like repose in June last year and woken up at Christmas, reading the Financial Times would have left me seriously confused (though I doubt Sleeping Beauty took much interest in macroeconomic trends, so her confusion might be easily explicable).   A whole array of macroeconomic risks that existed in mid 2008 not only faded away by the end of the year, they reversed.    Remember the global food crisis with severe impacts on developing countries?  Now commodity prices have crashed.  Inflation risks?  Gone.  Now we’re setting out to battle possible deflation.  Economic overheating in China?  Apparently we’re now on the brink of the 21st century version of the Great Depression.  In other words, the global economy has a bad case of whiplash.

I’ve compiled some evidence so you can appreciate just how much things have changed.  A sample of quotes from FT articles, just months apart.

Inflation Risks, 10 June 2008: ” Ben Bernanke, Federal Reserve chairman, believes that the danger of a ‘substantial downturn’ in the US economy has abated over the past month, but that inflation risks are increasing…. Eurozone inflation, at 3.6 per cent, is far above the ECB’s target of an annual rate ‘below but close’ to 2 per cent – and is expected to remain above that level significantly longer than previously expected.”

Deflation Risks, 4 November 2008: “The risk of deflation could lead Ben Bernanke to approach the new administration and Congress next year about adopting an ­inflation target at the Federal Reserve, some experts believe… He recognises that the deflation risk is not zero and will seek to minimise it, because sustained declines in core prices would greatly magnify all the problems ­facing the US economy.”

Weak dollar, 8 May 2008: “The US and Europe now have a united desire to see the dollar strengthen against the euro, senior officials have told the Financial Times. Senior eurozone officials believe that the dollar-euro rate had reached levels unhelpful to both the US and Europe.”

Strong dollar, 4 November 2008: “The dollar is rising… How can these conditions co-exist with a strong dollar? Against a basket of currencies, the dollar is up 22 per cent since its low for the year.”

Food Crisis, 5 July 2008: “The Group of Eight leading industrial nations will come under strong pressure at their annual summit in Hokkaido next week to boost food aid sharply after the Asian Development Bank added its voice to those warning that rising prices pose a grave threat to the world’s poor.”

Food Crisis?, 20 December 2008: “When [the FT] published a piece about food prices in January, British supermarkets were paying milk producers 26p a litre – the highest price in more than a decade… Today, the global wholesale milk price is down 40 per cent from record highs in 2008, while world grain prices are 50 per cent lower. More crops were planted and some export bans – imposed by countries worried about feeding their citizens during the ‘global food crisis’ – have been relaxed.”

Oil Prices, 22 May 2008: “Oil prices yesterday punched through $132 a barrel to a new high and fears of a looming global shortage pushed the cost of long-term oil beyond $140. Investors were increasingly worried that oil supplies, particularly from non-Opec countries, would be unable to meet rising demand in the next 10 years.”

Oil Prices, 14 January 2009: “World trade flows are falling fast as the credit crisis bites and oil prices plummet, with official figures yesterday showing export and import declines in the US, China, UK and Canada.”

Of course it’s not unusual for economies to go from looking good to looking bad (the history of financial crises is one where things look rosy until they look dire), but what’s odd about the whiplash phenomenon is that things went from being bad in one direction, to being bad in the complete opposite direction.

January Lagniappe

January 13, 2009

I am just back from my long winter’s nap; the Lent Term at LSE started yesterday and though I’ve been back working for a while, it feels more real now that fellow academics are back on the hall and students are on campus rushing to lecture.  And so, with the start of term comes my re-commitment to blogging.  Counter-intuitively, it is easier to post to the blog during term time because though I have more to do, I am more in touch with the goings on of the world.

Before we get back to the hard work of explaining globalisation, I thought that I would share 10 random tid-bits of information I picked up this holiday season.    Here they are, in no particular order:

1) The per kilo value of ostrich feathers was almost as much as diamonds at the height of the ostrich feather boom in the 1880s.

2) The word credit comes from the Latin “to believe.”   Trust is part of the credit system!  I should have known this since the Italian word “to believe” is credere.  But I never put the two together (blame the lack of Latin training in the American school system).

3) The price of gasoline in Texas is again ridiculously low: $1.69 a gallon in Austin a month ago.

4) Among the people that lived on my hall at Stanford, one has become a famous singer, one a professor of medicine at Harvard University and one will work  in the Obama administration.

5) A cutting board was a suprisingly popular item with the under 25 age group in our family Christmas gift exchange.

6) 330,000 people applied to work for the Obama administration using the incoming administrations’ online application system on  Only 44,000 applied to work for Bush in 2000.  I’m sure that the above-mentioned Stanford friend did not get his job this way.

7) Polyester these days looks incredibly like cotton.

8) In the Whitbread literary awards (now called the Costa Book Awards thanks to the London coffee shop’s sponsorship), the “best book of the year” is awarded in five categories: first novel, novel, poetry, biography and children’s book.  An overall book of the year is then chosen from the five.  A children’s book has never won.

9) The risk from talking on your mobile phone while driving is related to your brain, not your  hands.  Which means that hands-free devices are no help at all in avoiding accidents.

10) President Jimmy Carter is short.