Archives: 10/2016

Otmar Issing on the Fate of the Euro

Back in July 2015 I reminded Alt-M readers of a paper I presented at the 2012 Mont Pelerin Society meetings in Prague, as part of a session in which Otmar Issing, one of the euro’s architects, also took part. As I remarked in that last post, although Mr. Issing “put a much more favorable spin on the euro’s prospects for survival” than I did, I argued at the time that our apparent disagreement boiled down to the fact that while he chose to regard “the merest heartbeat from Frankfurt” as proof of the euro’s vitality, I considered it “for all intents and purposes already brain-dead.”

The gist of my argument was that the viability of the euro depended on strict enforcement of the 1997 Stability and Growth Pact. However, when both France and Germany were allowed to violate it in 2003, the pact ceased to be credible. “That change meant, in effect, that either the ECB’s independence or the no bailout commitment or both would have to give way, as both have indeed done.” That stage having been reached, I argued, the euro’s eventual disintegration was all but certain.

I’m bringing this up yet again because Central Banking Journal recently published a remarkable (but, unfortunately, gated) interview with Mr. Issing in which he acknowledges that the euro is indeed falling apart. What’s more, he agrees that the euro’s fate was sealed when “Germany and France violated the pact in 2003, delivering a fatal blow to the pact from which it has never recovered.”

The Yuan Makes New Lows, Donald and Hillary Should Relax

At a monetary conference in Vienna back in 2014, the distinguished Frenchman, my friend, and occasional collaborator Jacques de Larosière proclaimed that the current world monetary order should be termed an “anti-system.” He has a point – an important point. Among other things, such an anti-system invites an enormous amount of instability, as well as uninformed loose talk that influences public opinion and policy.

The Chinese yuan has been at the center of much of the recent misinformation and disinformation about currencies. For example, during the first presidential debate between Donald Trump and Hillary Clinton, Trump fingered China as the world’s best practitioner of currency devaluations – devaluations that Trump claims power China’s exports. Clinton didn’t object to Trump’s thesis. Indeed, she boarded the same bandwagon. And with the Chinese yuan making new lows, the ever-misinformed mercantilists who populate Washington, D.C. are clinging to the bandwagon, too.

What are the facts? Well, they contradict the Beltway’s conventional wisdom. Chinese exports have steadily risen since 1995, but they have not been powered by a depreciating yuan. In fact, the yuan has slightly appreciated in both nominal and real terms. The accompanying charts tell that story. Note that the real and nominal charts tell the same story because the inflation rates in the U.S. and China have been similar over the past two decades.

You Ought to Have a Look: Lukewarming, Carbon Taxes, and the HFC Agreement

You Ought to Have a Look is a regular feature from the Center for the Study of Science.  While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

One of our favorite lukewarmers, Matt Ridley, was invited by the Global Warming Policy Foundation to give its 2016 Annual Lecture. He certainly did not disappoint. While Matt titled his speech “Global Warming Versus Global Greening” that title only suggested part of what he had to say. We offer “The Hows and Whys of Lukewarming” to be a more apt descriptor:

These days there is a legion of well paid climate spin doctors. Their job is to keep the debate binary: either you believe climate change is real and dangerous or you’re a denier who thinks it’s a hoax.

But there’s a third possibility they refuse to acknowledge: that it’s real but not dangerous. That’s what I mean by lukewarming, and I think it is by far the most likely prognosis.

I am not claiming that carbon dioxide is not a greenhouse gas; it is.

I am not saying that its concentration in the atmosphere is not increasing; it is.

I am not saying the main cause of that increase is not the burning of fossil fuels; it is.

I am not saying the climate does not change; it does.

I am not saying that the atmosphere is not warmer today than it was 50 or 100 years ago; it is.

And I am not saying that carbon dioxide emissions are not likely to have caused some (probably more than half) of the warming since 1950.

I agree with the consensus on all these points.

I am not in any sense a “denier”, that unpleasant, modern term of abuse for blasphemers against the climate dogma…. I am a lukewarmer.

And from there, Ridley goes on to do a laudable job of laying out the case that future climate change from human activities will prove to be towards the low end of climate model projections—but squarely within the bounds of consensus expectations. As Matt puts it:

…I am not disagreeing with the consensus on climate change.

There is no consensus that climate change is going to be dangerous. Even the IPCC says there is a range of possible outcomes, from harmless to catastrophic. I’m in that range: I think the top of that range is very unlikely. But the IPCC also thinks the top of its range is very unlikely.

Be sure to check out the whole thing for a great review of why carbon dioxide emissions are not the civilization-ending monster that many climate activists would have you believe (plus there are a few surprises in there that you won’t want to miss).

Venezuela’s Inflation: The Wall Street Journal’s Reportage is Off, Way Off

Recent reportage in the Wall Street Journal by Matt Wirz, Carolyn Cui, and Anatoly Kurmanaev states that Venezuela’s annual inflation rate is 500 percent. The authors fail to indicate the source for that 500 percent figure. Knowing that the most accurate estimate of Venezuela’s current annual inflation rate is 55 percent, I concluded that the Journal was way off and set out to determine the source for its incorrect figure. The most likely candidate turned out to be the International Monetary Fund’s (IMF) October 2016 World Economic Outlook (WEO), which contains an estimate for Venezuela’s annual inflation. This report projects Venezuela’s annual inflation to average 475.8 percent for 2016, a far cry from my current estimate of 55 percent. The IMF’s figure, though, gives the appearance of a finger-in-the-wind approach because no methodology accompanies the IMF’s October report. The 95% rule reigns – 95% of what you read in the financial press is either wrong or irrelevant. 


So, how does one make an accurate estimate of inflation in countries experiencing elevated inflation levels? The Johns Hopkins-Cato Institute Troubled Currencies Project calculates reliable inflation estimates. These are based on changes in black market (read: free market) exchange rates. The principle of purchasing power parity (PPP) is used to translate exchange rate changes into estimates of implied inflation rates. When inflation is elevated, this method provides deadly accurate estimates.

Hillary Clinton’s Debt Promise (That She’d Definitely Break)

In the third and final debate last week, Hillary Clinton tried to flex her fiscal responsibility bona fides by vowing  that she “will not add a penny to the debt” on three separate occasions. That must mean she has comprehensive reforms to address entitlements, rein in other spending, and reduce our commitments abroad, if she is not going to add a penny to the current gross debt of $19.7 trillion, right? No, not really.

She is only promising not to make things worse relative to the current baseline, which projects the debt increase to $28.2 trillion over the next decade. To be fair, her plans would add less to the debt than Donald Trump’s, although that’s almost entirely due to an array of new taxes. Even with those hikes, the debt would increase a lot more than a penny were she to win, and neither major party candidate has put forward a substantive plan to address the problems with the country’s fiscal health.

And that’s just the projection over the next decade. The long-term fiscal picture is even bleaker. In the baseline scenario from the most recent Long-Term Budget Outlook from the Congressional Budget Office, federal debt held by the public will almost double by midcentury, from around 77 percent of GDP to more than 140 percent by 2046. Kicking the can down the road, which is effectively the plan by for both candidates in the debate due to their lack of an actual plan, would only increases the magnitude of the changes that will eventually be needed.

Clinton may have meant that her specific proposals are paid for, but even that is not accurate, as the Committee for a Responsible Federal Budget (CRFB) estimated that her proposals would add $200 billion to it, even with the assumption that she would be able to help shepherd immigration reform through Congress and attributing that positive fiscal impact to her. If she were to stabilize the debt to GDP ratio and restrict herself to her preferred method of hiking taxes on high earners (eschewing spending cuts or entitlement reform), she’d have to raise the top tax rate all the way to 61 percent, which would impose significant new disincentives and economic distortions. 

She is not promising that she would not “add a penny to the debt” or at least that can’t be what she means, unless she wants to set herself up to break that promise shortly after taking officer were she to win. She’s promising not to further accelerate our movement down the unsustainable fiscal path we’re on now, which is hardly comforting. Neither of the candidates at the debate last week has put forward any substantive plan to do anything to address the debt or our fiscal trajectory, despite what promises they may have made. 

The Perils of Financial Over-Regulation

Last Friday, I gave the opening remarks at the International Finance Corporation’s annual FinTech CEO Summit — a meeting of many of the top executives involved in developing cutting-edge alternatives to conventional means for raising capital and making payments, among other things. Because the event wasn’t recorded, I thought I’d share the remarks with you here.


I’m honored to be able to address an audience consisting of many of the world’s leading financial-market innovators. I don’t often get invited to speak on the subject of financial technology. That’s probably because the most advanced piece of financial technology concerning which I possess any real expertise is the steam-powered coining press that James Watt and his business partner Matthew Boulton designed a bit more than three centuries ago.

Still I know enough about more recent developments to realize that, so far as the future progress of financial innovation is concerned, these are critical times. Never has there been a more crying need for financial innovation — innovation to overcome the infirmities, not only of conventional private-market sources of capital and payments services, but also of the world’s official monetary systems. Yet never has the threat government regulators and their academic advisors pose to the unfolding of such innovations been so obvious.

When Civic Participation Means Shaming A Non-Voter’s Kid

This video, “Playground” [YouTube, Facebook] makes quite an impression. It shows a scene of schoolyard bullying but takes the side of the jeering, taunting mob – in the name of voting. It is one of a series of 30 second videos put out by a group calling itself Civic Innovation Works, encouraging a vote in the general election on November 8 and seemingly intended as public service announcements.  The others in the series appear to be similar in message, but lacking in this one’s outrageousness (although one does present a fantasy about publicly shaming a non-voter).  

On the off chance that Civic Innovation Works was someone’s idea of an elaborate parody I looked them up. I found that Fenton, the well-known progressive/”social change” public relations agency, takes credit for one of the other videos in the series.

So it would look as if they are on the level. It is almost as if they were trying with “Playground” to convince viewers that electoral politics makes people worse.