Bellerbys Economics - Mr Stephenson

Thursday, December 13, 2007

Buy Renminbi Today - Do it Now!!

For some time, many economists have argued that the renminbi has been undervalued.

Of course, this has produced benefits for China - allowing it's exports to grow rapidly to the point where it is now the industrial engine of the world - and also allowing it to attract massive levels of investement providing growth, jobs and opportunities for its people. The biggest prize of all has been the lifting of 400 million people out of absolute poverty in the last fifteen years alone.

However, just recently this policy has hit some problems - including criticism that China is standing on one leg (exports) and not two legs (exports and domestic consumption). Also the fairly rigid link to the dollar has helped to fuel inflation within the economy - as the dollar fell, the renminbi fell with it, making imports more expensive. Added to this, the increase in domestic consumption in the last year has made inflation worse as at least some of this consumption has been on increasingly expensive imports.

So, suddenly, it looks like the rules of the game may change a little. Zhou Xiaochuan, the chairman of the Chinese Central Bank has said today that he experts a significant increase in the value of the currency very soon as a way of reducing inflation and taking the pressure off interest rates. This is very likely to happen at the end of this week's US-China economic summit - a good time to make it look like the Chinese have been listening carefully to American advice (when in fact it's in the best interests of the Chinese to make the change at this point!). It will help to improve US-Chinese relations.

So this is today's big tip - buy renminbi today!! You can do this through many of the online dealers - here's one at random, but there are many others:

or through your local bank.

Wednesday, December 12, 2007

US Current Account Deficit

The US current account deficit for 2007 looks like a Fantasy Factory horror movie - it could well be around $680bn. That's a little less than last year's $700bn but still represents around 6.5% of US GDP. That's really an unsustainable level in the long term - most economists might argue that up to 3% is probably okay.

What's really worrying is that this is the figure about six months AFTER a major fall in the value of the US dollar - we would be expecting the J-Curve effect to have worked its way through by now - and exports to be rising and imports falling - so what's gone wrong.

Oil is the answer. The US now imports most of its oil and the price of this has risen to about $95 a barrel. This is a good example of a long-term Marshall-Lerner condition. This states that the trade balance will not improve if the sum of the price elasticities of exports and imports is less than one. The problem the US has over its oil imports is that the PED is VERY inelastic - you just try dragging an American out of his car and making him walk.

What's the solution to this? Well, another devaluation probably won't help - although it may well come as people continue to lose confidence in the US economy; a long-term drive towards alternative energy might help a little; but the real solution will be more investment in supply-side policies. This probably means that labour costs in the US must fall further in the short-term. Increased immigration from Mexico might help in this respect. This would be a very sensible economic platform for a candidate to stand by in the coming presidential election :>

Tuesday, December 04, 2007

United Russia

Even allowing for the fact that the results may have been tweaked a little bit, there's no doubting that United Russia's victory in the Russian election was impressive and based to a large extent on the general popularity of President Putin.

What's more interesting to economics students perhaps is that it provides confirmation for the 'Singapore Solution' that Russia has adopted under Putin's reign as its business and economics model. This is an economic system where government and big business are largely indistinguishable - with Government providing the infrastructure that business needs in order to develop. In exchange, big business operates in the best interests of the economy and the nation as a whole.

This is not entirely unique to Russia of course - the Chinese economy is developing in a very similar way - and the basic tenets of government-directed economic development, but with smaller businesses being free to develop and progress on the margins of the economy (sometimes called the Beijing Consensus). This may turn out to be the elusive third way between capitalism and communism that New Labour dreamed about when they came to power - but without apparently having the economic skills to bring it about.

This has been remarkably successful in Russia in the last seven years with economic growth averaging 7-8% a year every year. The Russian budget deficit is in fact a surplus of around 7% of GDP, there is virtually no public debt and a huge stablilisation fund is being used to buy shares in companies worldwide to ensure long-term revenue flows - and also to take money out of the economy as inflation is still running at 10% (too much oil money boosting demand).

There are still weaknesses, however - corruption is high and the business environment for small businesses is too restrictive with many regulatory barriers. These will be the two main targets of the new government in the next four years - the big question is, who will be Prime Minister?