Tag: cato

North Korea’s Hyperinflation Legacy, Part II

Following North Korean supreme leader Kim Jong-il’s death last December, many around the world had high hopes that his successor (and son), Kim Jong-un, would launch much-needed economic and political change. Unfortunately, in the months since the new supreme leader assumed power, little has changed for North Koreans outside of the small, communist upper class. The failed communist state has not delivered on its advertised economic reforms.

One thing it has delivered, however, is weapons, which have flowed through its illegal arms-trafficking pipelines. And, if that’s not enough, North Korea is planning another missile test  in the near future. But, as it turns out, the only thing that is certain to blast off is inflation.

In my recent blog post, I pointed out that one of North Korea’s communist legacies is hyperinflation (in addition to starvation). Indeed, hyperinflation may soon plague North Korea once again.

From what little data are available, it would appear that, in the span of six months, the price of rice has increased by nearly 130%. This is par for the course in North Korea, where the price of rice has increased by roughly 28,500% over the last three years (see the chart below).

 

 While the North Korean government worries about rocket launches and how to supply Syria with weapons, and while its archaeologists “discover” ancient unicorn lairs, its citizens’ food bowls are becoming quite expensive to fill. The supreme leader’s priorities, it would seem, are supremely out of whack.

Where’s Iran’s Money?

Since I first estimated Iran’s hyperinflation last month , I have received inquiries as to why I have never so much as mentioned Iran’s money supply. That’s a good question, which comes as no surprise. After all, inflations of significant degree and duration always involve a monetary expansion.

But when it comes to Iran, there is not too much one can say about its money supply, as it relates to Iran’s recent bout of hyperinflation. Iran’s money supply data are inconsistent and dated. In short, the available money supply data don’t shed much light on the current state of Iran’s inflation.

Iran mysteriously stopped publishing any sort of data on its money supply after March 2011. Additionally, Iranian officials decided to change their definition of broad money in March 2010. This resulted in a sudden drop in the reported all-important bank money  portion of the total money supply, and, as a result, in the total. In consequence, a quick glance at the total money supply chart would have given off a false signal, suggesting a slump and significant deflationary pressures, as early as 2010

While very dated, at least Iran’s state money, or money produced by the central bank (monetary base, M0), is a uniform time series. The state money picture, though dated, is consistent with a “high” inflation story. Indeed, the monetary base was growing at an exponential rate in the years leading up to the end of the reported annual series.  No annual data are available after 2010 (see the chart below).

Iran is following in Zimbabwe’s well-worn footsteps, trying to throw a shroud of secrecy over the country’s monetary statistics, and ultimately its inflation problems. Fortunately for us, the availability of black-market exchange-rate data has allowed for a reliable estimate  of Iran’s inflation—casting light on its death spiral .

Is Turkey Golden?

Recently, Moody’s Investors Service took some wind from Turkey’s sails, when it declined to upgrade Turkey’s credit rating to investment grade. Moody’s cited external imbalances, along with slowing domestic growth, as factors in its decision. This move is in sharp contrast to the one Fitch made earlier this month, when it upgraded Turkey to investment grade.   Moody’s decision not to upgrade Turkey, and its justification, left me somewhat underwhelmed – given how well the Turkish economy has done in recent years.

Since the fall of Lehman Brothers, Turkey’s central bank has employed a so-called unorthodox monetary policy mix. For example, a little over a year ago, it began to allow commercial banks to purchase gold from Turkish citizens and allowed banks to count gold to fulfill their reserve requirements. Incidentally, this was a remarkable success – from 2010-2012, the Turkish banking sector’s precious metal account increased by over 7 billion USD.

For all the criticism its unconventional monetary policies have garnered, the Central Bank of the Republic of Turkey has, in fact, produced orthodox, golden results. Indeed, as the accompanying chart shows, the central bank has delivered on the only thing that really matters – money.

Turkey’s economic performance has been quite strong (despite some concerns about inflation and its current account deficit) . Turkey’s money supply has been close to the trend level for some time, and it currently stands 2.41% above trend. This positive pattern is similar to that of many Asian countries, who continue to weather the current economic storm better than the West.  And, it stands in sharp contrast to the unhealthy economic picture in the United States and Europe – both of which register significant money supply deficiencies.

So, why would Moody’s not follow Fitch’s lead and upgrade Turkey to investment grade? To understand this divergence, one should examine Turkey’s recent current account activity. Since late 2011, Turkey’s current account has rebounded somewhat (see the accompanying chart).

But, if gold exports are excluded from the current account (on a 12-month rolling basis), a rather significant 47% of this improvement, from the end of 2011 to September 2012, magically disappears.

Where is this gold going? Well, a quick look at the accompanying chart shows just how drastically exports to Iran and the UAE have surged this year.

Taken together, the charts indicate that Turkey is exporting gold to Iran, both directly and via the UAE , propping up their current account in the process. This has put Turkey and the UAE in the crosshairs of proponents of anti-Iranian sanctions.   Those who beat the sanctions drum are now seeking to impose another round of sanctions, aimed at disrupting programs such as Turkey’s gold-for-natural-gas exchange. This proposal clearly highlights some of the problems associated with sanctions, specifically the unintended costs imposed on the friends of the U.S. and EU in the region. Indeed, Dubai has already taken a hit, with its re-exports falling dramatically as a result of the sanctions.

What is the U.S. to do – go against Turkey, its NATO ally? Believe it or not, some in the Senate are allegedly considering such a wrong-headed move.

If these proposed sanctions are implemented, then Moody’s pessimistic outlook on Turkey may turn out to be not so far from the mark, after all – and Turkey will have no one but its “allies” to blame.

From the Bank of Canada to Threadneedle Street – Finally

On July 1st 2013, Bank of Canada Governor Mark Carney will assume the position of Governor of the Bank of England . Will Carney’s hat-switching be good for the UK? At present, one thing is certain; Carney has delivered to Canada the one thing that matters – money .

A quick comparison of the money supply in Canada to that of the UK shows the stark differences in the health of their respective money supplies  (and thus, of their respective economies).

 

 

The Canadian money supply has managed to stay near trend throughout the post-Lehman era. In fact, the Canadian total money supply is currently 0.5% above trend, while the UK’s money supply is a dismal 12.1% below trend – no wonder the UK keeps flirting with recession. Although Canada’s GDP growth rates are less than stellar, they are above the average of the 34 OECD nations . Indeed, Canada’s overall economic outlook is much stronger than that of the UK .

In his new position, Carney will face the formidable challenge of turning around the UK’s slumping money supply. Regardless of Carney’s success in Canada, we will have to wait and see if he’ll be able to pull it off on the other side of the pond.

Zimbabwe’s Four-Year Anniversary—From Hyperinflation to Growth

In mid-November 2008, Zimbabwe recorded the world’s second-highest hyperinflation. Today, it can boast strong growth and single-digit inflation rates. In 2008, Zimbabwe’s annual real GDP growth rate was a miserable -17.6 percent and its annual inflation rate was 89.7 sextillion percent—that’s roughly 9 followed by 22 zeros.

So how did Zimbabwe go from economic ruin to an annual GDP growth rate of 9.32 percent in 2011, with estimates of relatively strong growth rates through 2013?  As I predicted in early 2008, the answer is simple: spontaneous dollarization brought an end to the horrors of hyperinflation.

In late 2008, the people of Zimbabwe spontaneously dollarized the economy. Thiers’ Law prevailed: good money drove out bad, and the government’s hands were tied. Indeed, the government was forced to officially dollarize in 2009. Since then, Zimbabwe has enjoyed positive GDP growth rates, a feat not accomplished since 2001 (see accompanying chart).

 

While these achievements are cause for celebration, there are still problems in paradise: Robert Mugabe continues to hold the reins of power; Zimbabwe’s “Ease of Doing Business” ranking is a dismal 172nd out of 185; and “change” is, in short, hard to come by. In addition, the government’s external debt is now close to $12.5 billion and lending rates between Zimbabwe’s embattled banks are as high as 25 percent. To top it off, the Zimbabwean government is attempting to force banks to buy its treasury bills at significantly discounted rates, after its debt auction flopped in early October. Talk about ruling with an iron fist.

If this isn’t bad enough, Zimbabwe’s official statistics have produced a very low signal-to-noise ratio—one that, quite frankly, leaves one listening to static. Both the quantity and quality of official data, ranging from migration statistics to trade figures, are in short supply, particularly data from the period of Zimbabwe’s 2007-08 hyperinflation.

None of this comes to a surprise to me. After all, as far as Zimbabwean officials are concerned, the country’s hyperinflation peaked in July 2008, with a monthly inflation rate of 2,600 percent. After this point, Zimbabwe stopped collecting and reporting data on price changes, throwing a shroud of secrecy over the country’s hyperinflation disaster. In reality, hyperinflation continued after July 2008, growing at an exponential rate until mid-November 2008.

Alex Kwok and I lifted the shroud on this hyperinflation in our 2009 Cato Journal article. We determined that Zimbabwe’s hyperinflation actually peaked in mid-November 2008, with a monthly rate over 30 million times higher than the final inflation rate reported by the government. In an attempt to correct the government’s lying statistics, I have contacted high officials in Zimbabwe via telephone and email. But, I have been stonewalled, given a bureaucratic runaround.

The last thing the Mugabe government seems to be interested in is an accurate account of the world’s second-highest hyperinflation. Lying statistics remain the order of the day.

Slumping Money Supply (Not Austerity) Plunges Hungary Into Recession

Hungary is in a recession, again. According to the chattering classes, as well as many analysts and financial reporters, fiscal austerity is the cause of Hungary’s slump.

Nonsense. Hungary’s recession results from its slumping money supply.

When monetary and fiscal policies move in opposite directions, the economy will follow the direction taken by monetary (not fiscal) policy – money dominates. For doubters, just consider Japan and the United States in the 1990s. The Japanese government engaged in a massive fiscal stimulus program, while the Bank of Japan embraced a super-tight monetary policy. In consequence, Japan suffered under deflationary pressures and experienced a lost decade of economic growth.

In the U.S., the 1990s were marked by a strong boom. The Fed was accommodative and President Clinton was super-austere – the most tight-fisted president in the post-World War II era. President Clinton chopped 3.9 percentage points off federal government expenditures as a percent of GDP. No other modern U.S. President has even come close to Clinton’s record.

The money supply picture for Hungary seemed to be looking up until late 2011 (see the accompanying chart). Indeed, Hungary’s money supply had nearly returned to its trend-rate level, when it peaked in November 2011. Then, in the course of just over a month, things took a turn for the worse.

First, Moody’s downgraded Hungary’s debt to junk status, and soon thereafter, S&P and Fitch followed suit. Then, the EU and IMF walked out on debt restructuring talks, citing concerns over proposed constitutional changes, which threatened the Hungarian central bank’s independence. Just days later, their fears were confirmed, as the Hungarian Parliament passed the controversial law, merging the central bank with the Financial Supervisory Authority. And, to top it off, Hungary unexpectedly cancelled part of its December debt auction.

When the dust settled, confidence in Hungary’s financial system had been shattered. Despite a 15.9% increase in the supply of state money, the total money supply had plummeted by 4.2% (from November 2011 to January 2012). As the accompanying table shows, this decline in the total money supply was driven by a 9% drop in the all-important bank-money component of the total.

Hungary’s money supply has yet to recover from this perfect monetary storm. And, as if that wasn’t enough, Hungary recently adopted a damaging financial transactions levy.

Money and monetary policy trump fiscal policy. Until Hungary gets its money and banking houses in order, its economy will continue to wallow in recession.

Class Size, Dropouts, & the Windy Atlantic

In Monday’s Wall Street Journal, I argued that America has too many public school employees, and has wasted those employees’ talents on a mass scale. Jordan Weissmann, an associate editor with The Atlantic, disagrees, accusing me of running “roughshod over a lot of important nuance.” As it happens, no nuances were injured in the composition of my piece.

Let’s consider Mr. Weissmann’s cruelty-to-nuance claims in turn. First, he feels that I ignored “significant evidence that smaller classrooms do indeed improve student performance,” citing two sources. The first source is an unsigned web-page by the “Center for Public Education” that is so biased in its selective coverage as to not be worth serious consideration. The second is a scholarly paper by Alan Krueger, author of one of the two best-known literature reviews of the subject.

What Weissmann doesn’t mention is the work of Eric Hanushek, author of the other best known literature review on class size. Krueger contends that class size reduction is usually educationally beneficial and cost effective, Hanushek argues the contrary on both points. It’s easy to compare their evidence and arguments because both contributed at length to the book: The Class Size Debate, published by the left-of-center Economic Policy Institute. It is a testament to how comfortable Hanushek is with the strength of his case vis-à-vis Krueger’s that he links to a full .pdf of that book from his own web pages at Stanford University. I understand why. When Hanushek looked at the most methodologically sound estimates—those that measure changes in student performance over time instead of at just a single point in time—he found that 89% show either no statistically significant advantage or a significant negative effect to smaller classes. To arrive at his opposing conclusion, Krueger had to, among other things, overweight the lower quality studies.

Hanushek’s conclusion is also more consistent than Krueger’s with the national U.S. data. The average American classroom has gotten substantially smaller over the past 40 years (by about 7 students) but achievement at the end of high-school is essentially flat. The only way to counter this evidence is to claim—usually without systematic basis—that children must be so much more difficult to teach today that the gains we would have seen from smaller classes have been eclipsed by this reduced “teachability.” The only systematic study of “teachability” trends of which I am aware does not support that claim—finding net “teachability” to have been mostly flat over time, with some improvement in the past decade.

Hanushek’s conclusion has also been supported by new, large-scale research, published after his and Krueger’s reviews. Harvard researchers Antonio Wendland and Matthew Chingos reported in 2010 that Florida’s state-wide class size reduction had “no discernible impact upon student achievement,” but has so far cost the state roughly $28 billion.

Some journalists are aware of the evidence that smaller classes generally do not improve outcomes. Consider, for example, this bit of reporting from last December:

Think of the ingredients that make for a good school. Small classes. Well-educated teachers. Plenty of funding. Combine, mix well, then bake. Turns out, your recipe would be horribly wrong, at least according to a new working paper out of Harvard…. The study comes courtesy of economist Roland Fryer, an academic heavyweight who was handed a MacArthur Foundation “genius award” earlier this year…. Fryer found that class size, per-pupil spending, and the number of teachers with certifications or advanced degrees had nothing to do with student test scores in language and math.

In fact, schools that poured in more resources actually got worse results.

Who is the astute journalist who wrote these words and from whom Jordan Weissmann could learn a few lessons? You guessed it… it was Jordan Weissmann, writing just seven months ago. How soon we forget.

Next, Weissmann claims that “dropout rates, for instance, have fallen by almost half since the 1970s.” Presumably he is unaware that this statement and the table he cites in support of it do not reflect reality. The “dropout rates” published in that NCES table are statistical fabrications of the nation’s education bureaucrats, looking to placate the public with the help of the remarkably credulous education media. You needn’t take my word for it. That is the finding of the left-leaning, Nobel-prize-winning, cited-by-President-Obama-with-approbation economist James Heckman. Heckman’s 2007 study, with Paul LaFontaine, is still the definitive work on the subject (though it was not the first to report the truth). Here is what Heckman and LaFontaine established through a painstaking analysis of the nation’s graduation data:

(a) the true high school graduation rate is substantially lower than the official rate issued by the National Center for Educational Statistics [the one cited by Weissmann]; (b) it has been declining over the past 40 years; (c) majority/minority graduation rate differentials are substantial and have not converged over the past 35 years; (d) the decline in high school graduation rates occurs among native populations and is not solely a consequence of increasing proportions of immigrants and minorities in American society;

They also note that the post-NCLB uptick in graduation rates probably does not imply a genuine improvement in educational outcomes:

NCLB gives schools strong incentives to raise graduation rates by any means possible. When monitoring was implemented in 2002, minority retention [a.k.a. “flunking”] dropped sharply and graduation rates turned upward, especially for minority groups. A similar pattern is observed following the publication of A Nation at Risk. Whether these represent real gains or are an indication of schools cheating the system in the face of political pressure remains an open question for future research, although the timing suggests strategic behavior [i.e., “cheating”].

The italics and the text in square brackets in the above quotations are mine.

The fact that public school systems report falsely rosy “dropout rates” is not a secret. Anyone who spends 60 seconds on Google will discover it. It’s even been reported in such popular media outlets as… Mr. Weissmann’s employer, The Atlantic. That page on the Atlantic’s website actually links to the very same Heckman and LaFontaine study I link to above. Heck, it’s even been mentioned in The New York Times (though they’ve managed to protect their most die-hard readers from cognitive dissonance by restricting coverage of these findings to David Brooks’ column).

Weissmann wraps up his blog post with a foray into the art of mind-reading:

I doubt Coulson truly believes we really have too many teachers in this country. He hints at so much in his last paragraph, writing, “While America may have too many teachers, the greater problem is that our state schools have squandered their talents on a mass scale.” Why the hedge? My guess is….

Kudos to any readers who correctly predicted that both Mr. Weissmann’s belief and his guess were wrong. The reason that I can make no certain statement about the ideal size of the U.S. education labor force is that no one can predict the allocation of human and capital resources that will occur in future in a free market. That said, there is reason to expect fewer teachers will be required under market conditions since our public school monopolies have been on a hiring spree 11 times faster than enrollment growth for forty years. Moreover, on-line learning and educational software options are only getting better and more numerous, and this should lessen demand for classroom teachers. Against those forces we have to consider that families may choose to invest some of the resulting savings from employing fewer classroom teachers in one-on-one tutoring, which is generally accepted as highly effective if, at present, too expensive to be much used.

One thing I can say with some certainty, based on the world-wide research literature comparing different sorts of school systems within countries, is that whatever particular allocation of teachers and capital resources the market arrives at will be more efficient than the gross, unproductive staffing bloat that has been perpetrated by state schooling. And, as I explained in that linked study, the existing small niche of non-profit private schools in the United States does not constitute a free education marketplace. A further explanation of the difference, should anyone find it necessary, can be found in this piece by economist John Merrifield.

To quickly correct some of Weissmann’s remaining errors: I am on record as not faulting teachers’ unions as the cause of our nation’s education woes. Their predations (e.g., contributing to the system’s demonstrably unproductive employment bloat) are a symptom, not the disease. And while some public school teachers are obviously overpaid, others have been equally obviously underpaid. The problem with public school teachers’ salaries at present is that they are allocated based on time-served and credentials (neither of which is consistently related to student achievement) rather than performance. Markets tend to compensate employees based on performance and so this problem, too, will likely be solved by liberalizing America’s education sector through programs like K-12 education tax credits.

This is probably all the time I will have to debunk the various flawed criticisms that were offered in response to my WSJ piece, so I thank Mr. Weissmann for conveniently collecting most of them in one place.