Topic: Finance, Banking & Monetary Policy

What Is Syria’s Iranian Credit Line Worth?

Last week, the press was filled with reportage about Tehran throwing a lifeline – actually a credit line of $3.6 billion  – to the Syrian regime.

The announcement of this Iranian lifeline should have changed the economic expectations of Syrians in the throes of what has morphed into a bloody civil war. Indeed, if it materializes, the $3.6 billion credit line should allow Damascus to conserve its dwindling supply of foreign exchange. This development should have thrown a positive expectation shock into the market for the Syrian pound.

So, did economic expectations receive a positive boost from the announcement of Tehran’s lifeline? Let’s go back to May 27th. That’s when the tentative credit line agreement was announced. A mini event study shows that the initial agreement had no material impact on expectations, as objectively measured by the Syrian pound/U.S. dollar black-market exchange rate. Indeed, the SYP/USD exchange rate was unmoved by the tentative agreement (see the accompanying table).

The next event in this credit line story occurred on July 30th, when it was announced that the May agreement had been finalized and signed on July 29th. Again, expectations and the SYP/USD exchange rate remained unmoved (see the accompanying table):

What, then, can we say about the Tehran-Damascus deal? Well, objective data – namely market prices – tell us that the widely-reported event had no material effect on Syrians’ economic expectations. Accordingly, the implied inflation rate for Syria remained unmoved. Using these objective black-market exchange-rate data, I estimate that Syria is currently experiencing an annual inflation rate of 190.7%.

In short, Syrians viewed the deal as irrelevant. They think that either Iranians won’t deliver on the promised credit line, or that if they do, it will not change the situation on the ground.

I often tell my students to be mindful of the late Prof. Armen Alchian’s “95% rule”: Ninety-five percent of what you read that passes for finance and economics is either wrong or irrelevant. For the time being, it appears that Syria’s Iranian credit line falls under the latter category.

I have established a page to track current black-market exchange-rate and implied inflation data for the Syrian pound, as well as for troubled currencies in Iran, Argentina, North Korea, and Venezuela. For more, see: The Troubled Currencies Project.

Entrepreneurs and Capital Gains Taxes

I testified to the Senate Small Business Committee last week about capital gains taxation.

I noted to the committee that reduced capital gains taxes can generate greater financing of young companies by angel investors and venture capitalists. Lower capital gains taxes can also encourage people to become entrepreneurs because the payoff from a successful start-up is improved compared to a wage job. Entrepreneurs put their own money into their ventures and want to maximize the financial returns from their hard work and sacrifice.

The higher capital gains taxes that were recently enacted risk killing off future Apples and Amazons, which we will need to power tomorrow’s economic growth. Congress raised the top federal tax rate on long-term capital gains from 15 percent to 23.8 percent. When state-level taxes are included, the average top U.S. tax rate on long-term capital gains is 27.9 percent.

U.S. policymakers need to understand that capital gains are different than ordinary income, which is why most nations have top capital gains tax rates that are much lower than their top rates on ordinary income. The U.S. capital gains tax rate is much higher than the average rate of just 16.4 percent in the 34 nations of the Organization for Economic Cooperation and Development (OECD).

Long-term capital gains should be subject to low or zero tax rates. Hopefully, federal policymakers will reconsider capital gains tax policy in coming months and reduce our tax rate to at least the average rate of our OECD trading partners. A lower capital gains tax rate would boost innovation, spur entrepreneurship, and help America regain its competitive edge.

See my recent report for a full discussion.

Egypt’s Vanishing Currency Black Markets

Despite escalating tensions between Egypt’s new military-backed government and supporters of ousted president Mohammed Morsi, there is at least one positive development coming out of the Land of the Nile. Yes, at long last, some semblance of stability appears to be returning to Egypt’s economy.

After the ouster of President Hosni Mubarak in 2011, the Egyptian economy took a turn for the worse. In particular, the Egyptian pound began to slide shortly after Morsi and his Muslim Brotherhood-backed government took power, sparking the development of a black market for foreign currency. The accompanying chart tells the tale: the official and black-market EGP/USD exchange rates began to diverge sharply in late 2012. In recent weeks, however, they have converged.

Recent currency auctions by the central bank, coupled with improved expectations about the country’s economic prospects, have begun to buoy the struggling pound. Indeed, the black-market exchange rate is now 7.13 EGP/USD, very close to the official rate of 7.00 EGP/USD. So, with Morsi, the black market appeared, and with the military’s re-entry, the black market has all but vanished.

The Egyptian stock market is echoing the confident sentiments displayed by the foreign exchange markets (see the accompanying chart). But, it remains to be seen if this newfound confidence in the Egyptian economy will be sustained.

Wall Street Journal Condemns OECD Proposal to Increase Business Fiscal Burdens with Global Tax Cartel

What’s the biggest fiscal problem facing the developed world?

To an objective observer, the answer is a rising burden of government spending, which is caused by poorly designed entitlement programs, growing levels of dependency, and unfavorable demographics. The combination of these factors helps to explain why almost all industrialized nations—as confirmed by BIS, OECD, and IMF data—face a very grim fiscal future.

If lawmakers want to avert widespread Greek-style fiscal chaos and economic suffering, this suggests genuine entitlement reform and other steps to control the growth of the public sector.

But you probably won’t be surprised to learn that politicians instead are concocting new ways of extracting more money from the economy’s productive sector.

They’ve already been busy raising personal income tax rates and increasing value-added tax burdens, but that’s apparently not sufficient for our greedy overlords.

Now they want higher taxes on business. The Organization for Economic Cooperation and Development, for instance, put together a “base erosion and profit shifting” plan at the behest of the high-tax governments that dominate and control the Paris-based bureaucracy.

What is this BEPS plan? In an editorial titled “Global Revenue Grab,” The Wall Street Journal explains that it’s a scheme to raise tax burdens on the business community:

After five years of failing to spur a robust economic recovery through spending and tax hikes, the world’s richest countries have hit upon a new idea that looks a lot like the old: International coordination to raise taxes on business. The Organization for Economic Cooperation and Development on Friday presented its action plan to combat what it calls “base erosion and profit shifting,” or BEPS. This is bureaucratese for not paying as much tax as government wishes you did. The plan bemoans the danger of “double non-taxation,” whatever that is, and even raises the specter of “global tax chaos” if this bogeyman called BEPS isn’t tamed. Don’t be fooled, because this is an attempt to limit corporate global tax competition and take more cash out of the private economy.

The Journal is spot on. This is merely the latest chapter in the OECD’s anti-tax competition crusade. The bureaucracy represents the interests of
high-tax governments that are seeking to impose higher tax burdens—a goal that will be easier to achieve if they can restrict the ability of taxpayers to benefit from better tax policy in other jurisdictions.

More specifically, the OECD basically wants a radical shift in international tax rules so that multinational companies are forced to declare more income in high-tax nations even though those firms have wisely structured their operations so that much of their income is earned in low-tax jurisdictions.

A Big, Tiny Deal on Student Loans

After a bit of a false start last week, it sounds again like the Senate is on the brink of a bipartisan compromise that will link rates on federal student loans to overall interest rates. Given all the hubbub that’s surrounded the loans, that’s big news. Given the actual change that would take place, it’s tiny.

Based on reports so far, the plan seems to be to eventually peg all undergraduate loans – both the officially “subsidized” and “unsubsidized” – to 10-year Treasury bill interest rates, adding 2.05 percentage points. Today, that would make the interest rate 4.57 percent. However, it appears that the compromise would put rates at 3.85 percent this fall. That’s no doubt a sweetener to appease student interest groups, whose goal is to get the cheapest loans possible regardless of the rest of the economy, and who don’t think a deal pegging student loans to T-bills is so hot.

To be fair, the deal isn’t hot. It’s barely room temperature. But that’s because it still gives away far too much, not too little. Taxpayer-backed loans that go to almost anyone have been a sweet-sounding disaster, encouraging people to consume education they aren’t willing or able to complete; prodding people who are college-ready to demand things that have little or nothing to do with education; and fueling rampant price inflation throughout the system. And, like last week’s abortive deal, this one appears to eliminate the different rates for the “subsidized” loans – those geared to truly low-income students – and the “unsubsidized” loans that have no income cap. In other words, the student aid system that is already heavily skewed toward the better-off seems likely to become a bit more so.

If this compromise eventually gets signed by the president, it will likely be hailed as a big, bipartisan deal. And maybe politically it would be. But as policy? It would barely register.

“Crisis” Averted on Backs of Poor?

This morning, I was greeted with the news that the Senate has reached a compromise on student loan rates, likely averting the “crisis” of having rates on “subsidized” loans – those most targeted toward low-income students – double from 3.4 percent to 6.8 percent. Of course this wasn’t really a crisis. The increase would only have affected new loans, would have just added about $6 to monthly payments based on the average yearly subsidized loan, and might even have been slightly useful because the primary problems in higher ed are massive over-consumption and price inflation driven by cheap aid. If we want to fix those things, we should be phasing out price and consumption-distorting aid programs.

Suppose, though, you think federal aid is necessary to make sure college is affordable for the truly needy. I assume that most aid supporters – including those who voted for the compromise in the Senate – would say that that is the top goal. So why, then, does the compromise set the same interest rates for subsidized loans as unsubsidized, the latter being accessible to anyone regardless of income? Wouldn’t a top priority be to keep the subsidized rates lower? (Subsidized loans would, importantly, still have interest covered by the government while students are in school.)

Maybe information explaining this will come out as more news breaks, but it seems quite possible that the main objective is not, actually, to help the most needy, but to appear to help anyone who wants to go to college, regardless of income or need. Maybe it is to curry favor with as many voters as possible. That hypothesis not only seems to fit the current case, but overall federal involvement in higher education, which involves not just Pell Grants or subsidized loans largely focused on the poor, but unsubsidized loans that have no income cap; tax credit programs skewed toward the well-to-do; and a whole perverse aid process that favors those people who know when to buy homes, time raises, and other savvy tactics to maximize what they get from schools and taxpayers.

If the goal were really to help the truly needy, it seems the Feds would have a single grant or loan program aimed squarely at people earning, say, 200 percent of the poverty line. But, as this compromise seems to further confirm, that’s probably not the primary goal. Maximizing votes is, which is exactly what we should expect from politicians who, like all of us, want first and foremost to get what’s best for themselves. It’s also why, for everyone’s sake, we should demand that the Feds stay completely out of student aid.

At Cato Unbound: The Private Digital Economy

What if money were private?

One very correct answer is, simply: Money already is private. Sure, there’s the old familiar legal tender of the U.S. government, but the idea of money, and the practices that surround it, are not necessarily tied to the greenback. We all know how money works, and other things can certainly be used in the dollar’s place – if a buyer and a seller agree. From there, if more buyers and sellers agree, the items they use may become a medium of exchange – a class of things held with the intention of passing them along in the market rather than using them directly.

As most of you probably know, that’s exactly what’s happening right now with bitcoin. But is bitcoin sound money? For that matter, what is it that makes a thing sound money? Gold wasn’t sound money just because of its inherent goldiness; it had (and has) distinct, identifiable properties that make it a pretty good money – properties that, say, land, automobiles, or hydrogen conspicuously lack.

How does bitcoin stack up? Will an all-digital private currency one day supplant fiat money? If so, will it be bitcoin or something else? There are alternatives, and some of them are quite successful, albeit less highly publicized in the West. 

Cato’s own Jim Harper discusses these issues in his lead essay for July 2013’s Cato Unbound. Coming up we have essays by Internet security consultant Dan Kaminsky, tech policy analyst Jerry Brito of the Mercatus Center, and Ph.D. candidate Chuck Moulton, who is writing his dissertation on transitions from unsound to relatively sound monetary systems.