18 (Author at Cato Institute) https://www.cato.org/rss/people/18 en 37th Annual Monetary Conference - Panel 4: Creating an Optimal Monetary System for a Free Society https://www.cato.org/multimedia/events/37th-annual-monetary-conference-panel-4-creating-optimal-monetary-system-free Peter Coy, George Selgin, William Nelson, William J. Luther, Steve H. Hanke <p>Full event: <a href="https://www.cato.org/events/37th-annual-monetary-conference" rel="noopener noreferrer" target="_blank">37<sup>th</sup> Annual Monetary Conference</a></p> <p>Shadowing the Fed’s strategic review, Cato’s 37th Annual Monetary Conference explores a broad array of recommendations for improving the monetary framework — and goes beyond the narrow scope of the Fed’s agenda to share a vision for a monetary system best suited for a free society.</p> Thu, 14 Nov 2019 10:32:22 -0500 Peter Coy, George Selgin, William Nelson, William J. Luther, Steve H. Hanke https://www.cato.org/multimedia/events/37th-annual-monetary-conference-panel-4-creating-optimal-monetary-system-free Venezuela’s Hyperinflation Drags on for a Near Record — 36 Months https://www.cato.org/publications/commentary/venezuelas-hyperinflation-drags-near-record-36-months Steve H. Hanke <div class="lead text-default"> <p>Venezuela is the only country in the world that is suffering from the ravages of hyperinflation. But, you wouldn’t know it from reading the press, where playing fast and loose with words is commonplace. Indeed, the word “hyperinflation” is thrown around carelessly and misused frequently, with claims that multiple countries are suffering from hyperinflation. The debasement of language in the popular press has gone to such lengths that the word “hyperinflation” has almost lost its meaning.</p> </div> , <div class="text-default"> <p>So, just what is the definition of this oft-misused word? The convention adopted in the scientific literature is to classify an inflation as a hyperinflation if the monthly inflation rate exceeds 50%. This definition was adopted in 1956, after Phillip Cagan published his seminal analysis of hyperinflation, which appeared in a book, edited by Milton Friedman, <a href="https://www.amazon.com/gp/product/0226264068/ref=x_gr_w_bb_sout?ie=UTF8&amp;tag=x_gr_w_bb_sout-20&amp;linkCode=as2&amp;camp=1789&amp;creative=9325&amp;creativeASIN=0226264068&amp;SubscriptionId=1MGPYB6YW3HWK55XCGG2" target="_blank"><em>Studies in the Quantity Theory of Money.</em></a></p> <p>Since I use high-frequency data to measure inflation in countries where inflation is elevated, I have been able to refine Cagan’s 50% per month hyperinflation hurdle. With improved measurement techniques, I now define a hyperinflation as an inflation in which the inflation rate exceeds 50% per month for at least thirty consecutive days.</p> <p>Just what is Venezuela’s inflation rate? Today, the annual inflation rate is 10,398% per year. How do I measure elevated inflation? The most important price in an economy is the exchange rate between the local currency – in this case, the bolivar – and the world’s reserve currency, the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black-market data are available, changes in the black-market exchange rate can be reliably transformed into accurate measurements of countrywide inflation rates. The economic principle of purchasing power parity (PPP) allows for this transformation. The application of PPP to measure elevated inflation rates is both simple and very accurate.</p> <p>Evidence from Germany’s 1920–23 hyperinflation episode – as reported by Jacob Frenkel in the July 1976 issue of the <a href="https://www.jstor.org/stable/3439924?seq=1#metadata_info_tab_contents" target="_blank"><em>Scandinavian Journal of Economics</em></a><em> </em>– confirms the accuracy of PPP during hyperinflations. Frenkel plotted the Deutschmark/U.S. dollar exchange rate against both the German wholesale price index and the consumer price index (CPI). The correlations between Germany’s exchange rate and the two price indices were very close to unity throughout the period, with the correlations moving to unity as the inflation rate increased.</p> <p>Beyond the theory of PPP, the intuition of why PPP represents the “gold standard” for measuring inflation during episodes of hyperinflation is clear. Virtually all goods and services are either priced in a stable foreign currency (the U.S. dollar) or a local currency (the bolivar). In Venezuela, bolivar prices are determined by referring to the dollar prices of goods, and then converting them to local bolivar prices after observing the black-market exchange rate. When the price level is increasing rapidly and erratically on a day-by-day, hour-by-hour, or even minute-by-minute basis, exchange rate quotations are the only source of information on how fast inflation is actually proceeding. That is why PPP holds and why I can use high-frequency data to calculate Venezuela’s inflation rate.</p> <p>Just how severe is Venezuela’s episode of hyperinflation? Well, that depends on the metrics used to measure severity. If one looks at the rate of inflation itself, Venezuela’s hyperinflation fails to make the Top Ten. Of the world’s fifty-eight episodes of hyperinflation that Nick Krus and I documented in the <a href="https://www.amazon.com/Routledge-Handbook-Economic-International-Handbooks/dp/0415677033" target="_blank"><em>Routledge Handbook of Major Events in Economic History</em></a>, Venezuela ranks as the 14th most severe hyperinflation. This is shown below in the frequency distribution of the days required for prices to double in the world’s hyperinflation episodes. At the peak of Venezuela’s inflation, which occurred in January 2019, it took 14.8 days for prices to double. This puts its rate at the upper-end of the mid-range of hyperinflation severity.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="475" alt="Hanke November 13, 2019 - Chart 1" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-11/960x0.png?itok=h2KBkIX9 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-11/960x0.png?itok=fHjkTMpy 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-11/960x0.png?itok=h2KBkIX9" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>If one measures severity by the duration of a hyperinflation, Venezuela’s hyperinflation, which started in November of 2016 and has yet to end, is severe. It has lasted for thirty-six months and counting. As the frequency distribution and table below show, there have only been two hyperinflations that have lasted longer than Venezuela’s.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="408" alt="Hanke November 13, 2019 - Chart 2" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-11/960x1.png?itok=AUkH6ZUO 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-11/960x1.png?itok=mHoVnK6G 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-11/960x1.png?itok=AUkH6ZUO" typeof="Image" /> </div> </figure> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="241" alt="Hanke November 13, 2019 - Chart 3" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-11/990x331-2.png?itok=Yw2Ik1oh 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-11/990x331-2.png?itok=T85iLxus 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-11/990x331-2.png?itok=Yw2Ik1oh" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>So much for the definition and accurate measurement of Venezuela’s hyperinflation. What about forecasts for the course and duration of Venezuela’s episode? Well, you can’t reliably forecast what heights a hyperinflation will reach, or when those heights will be reached.</p> <p>Surprisingly, that impossibility hasn’t stopped the International Monetary Fund (IMF) from throwing economic science to the winds. Yes, the IMF has regularly been reporting what are, in fact, absurd inflation forecasts for Venezuela. The table below presents the IMF’s finger-in-the-wind forecasts (read: nonsensical folly). Indeed, the IMF’s forecasting folly should be apparent to the naked eye. Just look at the table below. The IMF’s forecasts for 2019’s year-end inflation have ranged from 200,000% to a whopping 10,000,000%.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="409" alt="Hanke November 13, 2019 - Chart 4" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-11/960x4.png?itok=i-2zgN9o 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-11/960x4.png?itok=0Luqq_vn 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-11/960x4.png?itok=i-2zgN9o" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>Never mind. You can bet your boots that the financial press will continue to dutifully report the nonsense coming from the IMF citadel. When it comes to hyperinflation, both the IMF and the press are immune from economic science and the facts.</p> </div> Wed, 13 Nov 2019 14:03:01 -0500 Steve H. Hanke https://www.cato.org/publications/commentary/venezuelas-hyperinflation-drags-near-record-36-months Why Trump’s Wrongheaded Trade Strategy Is a Bust https://www.cato.org/publications/commentary/why-trumps-wrongheaded-trade-strategy-bust Steve H. Hanke <div class="lead text-default"> <p>President Trump repeatedly and proudly proclaims that his trade war strategy and tactics are designed to narrow the trade deficit. But, the facts make it clear that the President’s strategies are not working. Indeed, his assertions have been refuted again and again. Most recently, the U.S. Commerce Department reported that the U.S. trade deficit for both goods and services in the first three quarters of the year jumped by 5.4% over the same period last year. The facts make it clear that Trump’s war plan is wrongheaded—a bust. Yes, Trump is losing his battle to shrink the trade deficit. Why?</p> </div> , <div class="text-default"> <p>President Trump, alongside many business leaders, has strong views on international trade, particularly the U.S. external balance. He believes an external deficit is a malady caused by foreigners who manipulate exchange rates, impose tariff and non-tariff barriers, steal intellectual property and engage in unfair trade practices. The President and his followers feel the U.S. is victimized by foreigners, as reflected in the country’s negative external balance.</p> <p>This wrongheaded mercantilist view of international trade and external accounts has its roots in how individual businesses operate. A healthy business generates positive free cash flows – revenues exceed outlays. If a business cannot generate positive free cash flows on a sustained basis, take on more debt or issue more equity to finance itself, then it will be forced to declare bankruptcy.</p> <p>Business leaders employ this general free-cash-flow template when they think about the economy and its external balance. For them, a negative external balance for the nation is equivalent to a negative cash flow for a business. In both cases, more cash is going out than is coming in.</p> <p>But, this line of thinking represents a classic fallacy of composition. This is the belief that what is true of a part (a business) is true for the whole (the economy). Alas, economics is littered with fallacies. These cause businessmen to confuse their own arguments about international trade and external balances almost beyond reason.</p> <p>The negative external balance in the U.S. is not a “problem,” nor is it caused by foreigners engaging in nefarious activities. The U.S.’s negative external balance, which the country has registered every year since 1975, is “made in the USA,” a result of its savings deficiency.</p> <p>To view the external balance correctly, the focus should be on the domestic economy. The external balance is homegrown; it is produced by the relationship between domestic savings and domestic investment. Foreigners only come into the picture “through the backdoor.” Countries running external balance deficits must finance them by borrowing from countries running external balance surpluses.</p> <p>It is the gap between a country’s savings and domestic investment that drives and determines its external balance. This is demonstrated by the “savings-investment identity.” In economics, identities play an important role. By definition, they are always true. Identities are derived generally by expressing an aggregate as a sum of parts, or by equating two different breakdowns of a single aggregate.</p> <p>The national savings-investment gap determines the current account balance. Both the public and private sector contribute to the current account balance through their respective savings-investment gaps. The counterpart of the current account balance is the sum of the private savings-investment gap and public savings-investment gap or the public sector balance.</p> <p>The U.S. external deficit, therefore, mirrors what is happening in the U.S. domestic economy. U.S. data support the important savings-investment identity. As shown in the table below, the cumulative current account deficit the U.S. has racked up since 1973 is $11.488 trillion, and the amount by which total savings has fallen short of investment is $11.417 trillion.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="152" alt="Hanke Forbes 11/12/2019 - Table 1" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-11/hanke-forbes-11-12-19-1.jpg?itok=U95qrOjx 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-11/hanke-forbes-11-12-19-1.jpg?itok=E-yKKBQ8 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-11/hanke-forbes-11-12-19-1.jpg?itok=U95qrOjx" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>But, that is not the end of the story. Disaggregated U.S. data are available that have allowed Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprises researcher <a href="https://www.cato.org/sites/cato.org/files/2019-10/hanke-strange-word-trade-wars-2019.pdf" target="_blank">Edward Li and me</a> to calculate both the private and government contributions to the U.S. current account deficit. As shown in the table, the U.S. private sector generates a savings surplus—that is to say, private savings exceed private domestic investment—so it actually reduces (makes a negative contribution to) the current account deficit. The government stands in sharp contrast to the private sector, with the government accounting for a cumulative savings deficiency—that is to say, government domestic investment exceeds government savings, resulting in fiscal deficits—that is almost twice the size of the private sector surplus.</p> <p>Clearly, then, the U.S. current account deficit is driven by the government’s (federal, plus state and local) fiscal deficits. Without the large cumulative private sector surplus, the cumulative U.S. current account deficit since 1973 would be almost twice as large as the one that’s been recorded.</p> <p>The straightforward implication of this analysis is that President Trump can bully countries he identifies as unfair traders and can impose all the restrictions on trading partners that his heart desires, but it won’t change the current account balance. The U.S. current account deficit is solely a function of the savings deficiency in the U.S., in which the government’s fiscal deficit is the proverbial elephant in the room.</p> </div> Tue, 12 Nov 2019 13:56:22 -0500 Steve H. Hanke https://www.cato.org/publications/commentary/why-trumps-wrongheaded-trade-strategy-bust On Extending the Currency Board Principle in Bulgaria: Long Live the Currency Board https://www.cato.org/publications/outside-articles/extending-currency-board-principle-bulgaria-long-live-currency-board Tue, 12 Nov 2019 10:06:20 -0500 Steve H. Hanke https://www.cato.org/publications/outside-articles/extending-currency-board-principle-bulgaria-long-live-currency-board Latin America Sinks under the Weight of its Third-Rate Currencies https://www.cato.org/publications/commentary/latin-america-sinks-under-weight-its-third-rate-currencies Steve H. Hanke <div class="lead text-default"> <p>Latin America is plagued with many endemic economic problems. As a result, slow growth and economic instability are the order of the day. Latin America is sinking. In the grand scheme of things, it’s become irrelevant.</p> </div> , <div class="text-default"> <p>When it comes to listing culprits that account for the zombie growth rates in Latin America, the laundry list usually includes: high levels of corruption, a weak application of the rule of law, poor public services, a lack of public safety, and so on.</p> <p>A quick look at the International Monetary Fund’s (IMF) most recent <a href="https://www.imf.org/en/Publications/WEO" target="_blank">World Economic Outlook</a> tells the tale. Six months ago, the IMF predicted that the region would grow at an anemic 1.4% this year. Now, the IMF has downgraded Latin America’s growth rate for 2019 to a measly 0.2%. Given the recent turmoil in Ecuador, Bolivia, and Chile, I think the IMF’s most recent forecast might be too rosy. And, if that’s not bad enough, the IMF forecasts for the next five years indicate that the prospects for the region are bleak. Indeed, the IMF’s five-year forecasts indicate that most of the countries in Latin America will grow below the global average for emerging market economies</p> <p>The real problem that plagues most Latin American countries is the fact that they have central banks that issue half-baked local currencies. Although widespread today, central banks are relatively new institutional arrangements. In 1900, there were only 18 central banks in the world. By 1940, the number had grown to 40. Today, there are over 150.</p> <p>Before the rise of central banking, the world was dominated by unified currency areas, or blocs, the largest of which was the sterling bloc. As early as 1937, the great Austrian economist Friedrich von Hayek warned that the central banking fad, if it continued, would lead to currency chaos and the spread of banking crises. His forebodings were justified. With the proliferation of central banking and independent local currencies, currency and banking crises have engulfed the international financial system with ever-increasing severity and frequency. What to do?</p> <p>The obvious answer is for vulnerable emerging-market countries, like those in Latin America, to do away with their central banks and domestic currencies, replacing them with a sound foreign currency. Panama is a prime example of the benefits from employing this type of monetary system. Since 1904, it has used the U.S. dollar as its official currency. Panama’s dollarized economy is, therefore, officially part of the world’s largest currency bloc.</p> <p>The results of Panama’s dollarized monetary system and internationally integrated banking system have been excellent (see the table below).</p> </div> , <div class="text-default"> <p align="center"><img data-src="https://www.cato.org/sites/cato.org/files/images/hanke-forbes-10-25-2019.png" class=" lozad" /></p> </div> , <div class="text-default"> <ul><li>Panama’s GDP growth rates have been relatively high. Since 1994, when the Mexican tequila crisis commenced, real GDP growth has averaged 5.7% per year.</li> <li>Inflation rates have been somewhat lower than those in the U.S. Since 1994, CPI inflation has averaged only 2.2% per year.</li> <li>Since Panama’s fiscal authorities can’t borrow from a central bank, the fiscal accounts face a “hard” budget constraint dictated by the bond markets. In consequence, fiscal discipline is imposed, and since 1994, Panama’s fiscal deficit as percent of GDP has averaged 1.6% per year.</li> <li>Interest rates have mirrored world market rates, adjusted for transaction costs and risk.</li> <li>Panama’s real exchange rate has been very stable and on a slightly depreciating trend vis-à-vis that of the U.S.</li> <li>Panama’s banking system, which operates without a central bank lender of last resort, has proven to be extremely resilient. Indeed, it weathered a major political crisis between Panama and the United States in 1988 and made a strong comeback by early 2000.</li> </ul><p>To avoid the pain described in the IMF’s World Economic Outlook, Latin American countries should dump their central banks and local currencies. They should follow Panama’s lead and adopt the greenback.</p> </div> Fri, 25 Oct 2019 13:05:10 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/latin-america-sinks-under-weight-its-third-rate-currencies The "Strong" Dollar Hits U.S. Corporate Profits https://www.cato.org/publications/commentary/strong-dollar-hits-us-corporate-profits Steve H. Hanke <div class="lead text-default"> <p>The third-quarter earnings session is upon us, and the <a href="https://www.wsj.com/articles/u-s-companies-cant-buck-a-strong-dollar-11571400001" target="_blank"><em>Wall Street Journal </em>reports</a> that sixteen companies have already indicated that a “strong” dollar will hit their bottom lines. The S&amp;P 500’s technology sector, which generates more than half of its revenue overseas, is heavily exposed to currency risk. Firms that produce materials, as well as energy companies and consumer staples, are also in the crosshairs of a strong dollar.</p> </div> , <div class="text-default"> <p>Profit worries generated by the zigs and zags of the U.S. dollar were not always the case. In 1944, the Bretton Woods Agreement established a new global monetary system. Its hallmark was exchange-rate stability. That stability was accompanied by a general acceleration of growth in the post-war golden age. By 1973, the system had been swept into the dustbin by the broom of President Nixon. With that, the world entered an era of flexible, unstable exchange rates, or what my good friend, the great <a href="https://en.wikipedia.org/wiki/Jacques_de_Larosi%C3%A8re" target="_blank">Jacques de Larosière</a>, terms an anti-system.</p> <p>This exchange-rate instability creates problems — big problems—for the economy as well as corporations. If we look back at the onset of the Great Recession, we should ask, were exchange rates stable back in the fall of 2008? As it turns out, one of the few who had a laser focus on what he deems the most important price in the world, the dollar-euro exchange rate, was another good friend, Nobelist <a href="https://en.wikipedia.org/wiki/Robert_Mundell" target="_blank">Robert “Bob” Mundell</a>. A founding father of supply-side economics, Bob is always focused on prices. That certainly separates Mundell from Ben Bernanke, who was Chairman of the Federal Reserve back in September of 2008. Bernanke saw fit to ignore fluctuations in the value of the dollar. Indeed, changes in the dollar’s exchange-rate value did not appear as one of the six metrics on “Bernanke’s Dashboard” — the one the Chairman used to gauge the appropriateness of monetary policy.</p> <p>Well, let’s take a look at what Mundell saw in the months surrounding the collapse of Lehman and the onset of the Great Recession. He observed a wild swing in the dollar-euro exchange rate (see the table below). In the July-November 2008 period, the greenback appreciated almost 24% against the euro. Accompanying that swing was an even sharper one in the price of oil. It plunged by 57%. Gold, too, had a sharp fall of almost 22%. And, consistent with Mundell’s supply-side theories, changes in exchange rates transmit inflation (or deflation) into economies, and they can do so rapidly. Not surprisingly, then, the annual rate of inflation in the U.S. moved from an alarming rate of 5.6% in July 2008 to an outright deflation of 2.1% a year later. This 7.7 percentage-point swing is truly stunning.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="647" height="225" alt="Hanke Forbes October 22, 2019 Image 1" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-10/hanke-forbes-10-22-19-1.png?itok=CasmS9W9 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-10/hanke-forbes-10-22-19-1.png?itok=ohhe3v22 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-10/hanke-forbes-10-22-19-1.png?itok=CasmS9W9" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>So, in terms of monetary policy, Mundell saw the obvious: the Fed was too tight — massively too tight. The dollar was soaring, and commodity prices were collapsing. Fed Chairman Bernanke saw none of this because exchange-rates weren’t even on his dashboard. Alas, the Fed’s massive monetary squeeze and resulting unstable dollar ushered the economy into a recession.</p> <p>Well, here we are again. Today, there is a great deal of strain in the international anti-system. The dollar’s strength has ratcheted up emerging market pain. Indeed, emerging markets and commodities are under a great deal of downward pressure. And, several emerging market currencies — most notably Argentina’s peso — have collapsed, sending inflation soaring. It’s time to jettison the international anti-system and go for stability</p> <p>This earning season is not the only time corporations have shown concern for exchange-rate instability and its associated risks. Back in 2017, I tasked two of my assistants, Zackary Baker and Cameron Little, with what was an onerous job. They read every annual report of the 100 largest U.S. Companies to determine whether the companies noted exposure to foreign exchange risk, whether they hedged those risks, and whether they quantified their foreign exchange losses.</p> <p>As the chart below indicates, 100% of the largest U.S. companies indicated an exposure to foreign exchange risks, with 80% indicating that they quantified their losses. Its obvious: U.S. corporations should provide a strong coalition to support a new system that would ensure more exchange-rate fixity and predictability.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="655" height="401" alt="Hanke Forbes October 22, 2019 Image 2" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-10/hanke-forbes-10-22-19-2.png?itok=CDCCCfD_ 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-10/hanke-forbes-10-22-19-2.png?itok=a1pnVi1u 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-10/hanke-forbes-10-22-19-2.png?itok=CDCCCfD_" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>So, what has to be stabilized? The world’s two most important currencies — the dollar and the euro — should, via formal agreement, trade in a zone of stability ($1.20 – $1.40 per euro, for example). Under such an agreement, the European Central Bank (ECB) would be obliged to maintain this zone of stability by defending a weak dollar via dollar purchases. Likewise, the U.S. Treasury (UST) would be obliged to defend a weak euro by purchasing euros. Just what would have happened under such a system (counterfactually) since the introduction of the euro in 1999 is depicted in the chart below. When the euro-dollar exchange rate was less than $1.20 per euro and the euro was weak, the UST would have been purchasing euros (in the 1999 - 2003 and the 2014 – 2019 periods). When the euro-dollar exchange-rate was above $1.40 per euro and the dollar was weak, the ECB would have been purchasing dollars (in some of the 2007-2011 period).</p> <p>Stability might not be everything, but everything is nothing without stability.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="658" height="504" alt="Hanke Forbes October 22, 2019 Image 3" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-10/hanke-forbes-10-22-19-3.png?itok=BCYUUGoB 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-10/hanke-forbes-10-22-19-3.png?itok=PNfElU_l 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-10/hanke-forbes-10-22-19-3.png?itok=BCYUUGoB" typeof="Image" /> </div> </figure> Tue, 22 Oct 2019 09:58:16 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/strong-dollar-hits-us-corporate-profits Steve H. Hanke delivers the first John Ise Distinguished Lecture, “A Discussion on Economics and Everything Under the Sun,” at the University of Kansas https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-participates-event-discussion-economics-everything Thu, 17 Oct 2019 10:38:13 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-participates-event-discussion-economics-everything Trade Wars: Facts and Fallacies https://www.cato.org/publications/commentary/trade-wars-facts-fallacies Steve H. Hanke <div class="lead text-default"> <p>U.S. President Donald Trump, alongside many others, has a straightforward view on international trade, particularly the U.S. external balance. They believe an external deficit is a malady caused by foreigners who manipulate exchange rates, impose tariff and non-tariff barriers, steal intellectual property, and engage in unfair trade practices. The president and his followers feel the U.S. is victimized by foreigners, as reflected in the country’s negative external balance.</p> </div> , <div class="text-default"> <p>This mercantilist view of international trade and external accounts is wrongheaded. The negative external balance in the U.S. is not a “problem,” nor is it caused by foreigners engaging in nefarious activities. The U.S.’s negative external balance, which the country has registered every year since 1975, is “made in the USA”—a result of its savings deficiency.</p> <p>To view the external balance correctly, the focus should be on the domestic economy. The external balance is homegrown; it is produced by the relationship between domestic savings and domestic investment. Foreigners only come into the picture ‘through the backdoor’. Countries running external balance deficits must finance them by borrowing from countries running external balance surpluses.</p> <p>It is the gap between a country’s savings (read: income, minus consumption) and domestic investment that drives and determines its external balance. This fact can easily be seen by studying the savings-investment identity:</p> <p><em>CA = S<sub>private</sub> – I<sub>private</sub> + S<sub>public</sub> – I<sub>public</sub>,</em></p> <p>where <em>CA</em> is the current account balance, <em>S<sub>private</sub></em> is private savings, <em>I<sub>private</sub></em> is private domestic investment spending, <em>S<sub>public</sub></em> is government savings, and <em>I<sub>public</sub></em> is government domestic investment spending. In this form, <em>S<sub>private</sub></em> – <em>I<sub>private</sub></em> is the savings-investment gap for the private sector and <em>S<sub>private</sub>– I<sub>public</sub></em> is the savings-investment gap for the government sector. For a full derivation of the identity in this form, see “The Strange and Futile World of Trade Wars” by Steve H. Hanke and Edward Li in the Fall 2019 issue of the <em>Journal of Applied Corporate Finance.</em></p> <p>First, the national savings-investment gap determines the current account balance. Both the public and private sector contribute to the current account balance through their respective savings-investment gaps. The counterpart of the current account balance is the sum of the private savings-investment gap and public savings-investment gap (read: the public sector balance).</p> <p>The U.S. external deficit, therefore, mirrors what is happening in the U.S. domestic economy. This holds true for any country, even those with significant external surpluses. The chart below, which comports with the savings-investment identity, makes this clear. The U.S. displays a savings deficiency and a negative current account balance that reflects its negative savings-investment gap. Japan and China display savings surpluses, and both run current account surpluses that mirror their positive savings-investment gaps.</p> <p><img data-src="https://specials-images.forbesimg.com/imageserve/5da611c7db4026000620240d/960x0.jpg" class=" lozad" /></p> <p>The table below shows again that U.S. data support the important savings-investment identity. The cumulative current account deficit the U.S. has racked up since 1973 is $11.488 trillion, and the amount by which total savings has fallen short of investment is $11.417 trillion. But, that is not the end of the story. Disaggregated U.S. data are available that allow us to calculate both the private and government contributions to the U.S. current account deficit. As shown in the table, the U.S. private sector generates a savings surplus—that is to say, private savings exceed private domestic investment—so it actually reduces (makes a negative contribution to) the current account deficit. The government stands in sharp contrast to the private sector, with the government accounting for a cumulative savings deficiency—that is to say, government domestic investment exceeds government savings, resulting in fiscal deficits—that is almost twice the size of the private sector surplus. Clearly, then, the U.S. current account deficit is driven by the government’s (federal, plus state and local) fiscal deficits. Without the large cumulative private sector surplus, the cumulative U.S. current account deficit since 1973 would be almost twice as large as the one that’s been recorded.</p> <p><img data-src="https://specials-images.forbesimg.com/imageserve/5da61172cd594c0006212364/960x0.jpg" class=" lozad" /></p> <p>The straightforward implication of this analysis is that President Trump can bully countries he identifies as unfair traders and can impose all the restrictions on trading partners that his heart desires, but it won’t change the current account balance. The U.S. current account deficit is solely a function of the savings deficiency in the U.S., in which the government’s fiscal deficit is the proverbial elephant in the room. And how is the current account deficit financed?</p> <p>Well, it turns out that foreigners who generate savings surpluses and current account surpluses finance the U.S. current account deficits. It is clear, therefore, that current account balances represent nothing more than a measure of the international trade in savings.</p> <p>What’s more, the Trump administration’s fiscal policies, which promise ever-widening fiscal deficits, will throw a monkey-wrench into President Trump’s trade policy works. Indeed, if his fiscal deficits are not offset by an increase in private savings relative to private investment, increases in the federal budget deficit will translate into larger current account deficits. So, the U.S. current account deficit will not only continue to be made in the good old U.S.A., but it will be greatly enlarged by President Trump himself—the professed archenemy of external imbalances.</p> <p>The good news, however, is that the U.S. has been able to finance its current account deficit with relative ease. Indeed, foreigners are more than willing to park their savings in U.S.-dollar-denominated assets. This is a tribute to the dollar’s role as the world’s reserve currency, America’s creditworthiness, and the effectiveness of U.S. corporate governance.</p> <p>The level of economic illiteracy that surrounds the strange world of international trade policy is stunning. Now we have irrefutable arguments and evidence to explain why a country’s external balance is determined domestically, not by foreigners. As the history of trade policy shows, it’s difficult to change false beliefs with facts. But, now we have even more damning evidence to refute the false beliefs than ever before.</p> </div> Tue, 15 Oct 2019 11:11:56 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/trade-wars-facts-fallacies The Strange and Futile World of Trade Wars https://www.cato.org/publications/outside-articles/strange-futile-world-trade-wars Tue, 15 Oct 2019 09:50:34 -0400 Steve H. Hanke, Edward Li https://www.cato.org/publications/outside-articles/strange-futile-world-trade-wars The Great American Indian Land Heist https://www.cato.org/publications/commentary/great-american-indian-land-heist Steve H. Hanke <div class="lead text-default"> <p>Today, we celebrate Indigenous Peoples’ Day in the U.S. I use the word “celebrate” advisedly. The record of the U.S. government’s treatment of American Indians has been dismal. The scene has been set many times. Indeed, in 1831, the U.S. Supreme Court concluded that the relationship between the federal government and the Indian tribes was that of a “ward to his guardian.” With that, the die was cast. The Indians were deemed to be mere wards of the State—dependencies of the federal government.</p> </div> , <div class="text-default"> <p>Throughout the 19th century, Indian policymaking was characterized by simplistic diagnoses of Indian problems, easy solutions, and stereotypes of Indians as uncivilized savages. During the early decades of the century, Indian policy was influenced primarily by missionaries who believed that the teachings of the Bible and acceptance of the Sabbath were the best means for civilizing Indians and integrating them into society.</p> <p>The lack of success of the missionary approach led to the domination of policymaking by 19th-century liberals. They believed that exposing Indians to private property rights and a laissez-faire economic system would enable them to better adjust to a civil society. The latter approach, as well as Indian stereotypes characteristic of the era, are well captured in the views of Merrill E. Gates, president of both Amherst College and the Lake Mohonk Conference of the Friends of the Indians. In his presidential address at the 1896 annual meeting of the Conference, he observed that there was a "need of awakening in the savage Indian broader desires and ampler wants…. Discontent with the tepee and the starving rations of the Indian camp in winter is needed to get the Indian out of the blanket and into trousers." Moreover, he argued, these trousers needed to have "a pocket in them... a pocket that aches to be filled with dollars.”</p> <p>The Dawes Severalty Act of 1887 was a product of such thinking. Most influential people thought that hard work, thrift, and a system of private property rights would encourage and enable Indians to acquire wealth and become integrated into society. The Dawes Act authorized the President to allot land on Indian reservations to individual Indians. Heads of families were to receive 160 acres, while others were to receive smaller allotments. Indians were also to receive full citizenship with the land transfers. Titles were to be held in trust by the United States government for 25 years, and then the land could be freely transferred. "Surplus" land—land left over after the allotments had been made—was to be sold on the open market.</p> <p>Since there were considerably more "Indian lands" than acreages that qualified for Indian allotments, almost half of the land controlled by Indians was declared "surplus" and removed from their control. This amounted to nothing more than a great American Indian land heist. Also, many Indians who qualified and received allotments sold their newly acquired lands. This further reduced lands under Indian ownership and control. In addition, and perhaps most importantly, Indians (as well as many white homesteaders) were not afforded common-law protections that accompany property and contracts. Property rights and contracts were often neither enforced nor protected. Indeed, many Indians lost their lands through tactics that ranged from deceit and duplicity to murder.</p> <p>With the passage of the Dawes Act in 1887, the land area “controlled” by Indians was reduced by 50%. By the time the so-called Indian New Deal of 1934 arrived—reversing the policies set in motion by the Dawes Act—about 38% of the acreage that had been allocated to Indians under provisions of the Act was transferred to non-Indians through sales and other means. Moreover, much of the land that the Indians retained was semiarid or desert land in the Southwest. This, along with the fact that the average parcel awarded to an Indian was only 160 acres, resulted in a great deal of Indian ownership that was not economically viable.</p> <p>The experience of the Dawes Act led Indians to distrust private ownership. This is most unfortunate since private ownership had little to do with the failure of the Dawes Act. Rather, the Act failed as the result of a poorly conceived federal policy and a frontier justice system that did not properly recognize and use the common law of property and contracts. Consequently, in a misguided effort to ensure that they are not exploited by private property institutions, many Indians have favored public ownership.</p> <p>But, Indian views are neither monolithic nor static. The Siletz Indians in Oregon, whom I served as an adviser to in the 1980s, endorsed privatization. And, it’s clear why they did. If privatized, the value of the Siletz reservation lands would increase by nearly threefold.</p> </div> Mon, 14 Oct 2019 11:08:45 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/great-american-indian-land-heist The Trade War That Never Stops https://www.cato.org/publications/commentary/trade-war-never-stops Steve H. Hanke <div class="lead text-default"> <p>Over the weekend, the White House suspended the tariff increases against Chinese goods that were scheduled to be imposed on October 15<sup>th</sup>. As they say, thank God for small favors. The reality is that President Trump is “all in” on a trade war with China. The U.S. is an imperial power that is fatally attracted to trade wars. The hostilities will continue.</p> </div> , <div class="text-default"> <p>Ninety-five percent of what you read in the press about economics and finance is either wrong or irrelevant. That rate is even higher when it comes to the scribbling about America’s trade deficit. Politicians spew unsupported neo-mercantilist rhetoric, claiming that the trade deficit is a malady and is caused by foreigners engaging in unfair trade practices. Business leaders also embrace and repeat such unfounded views about the source of the U.S. trade deficit. In their quest for negative news, the press latches onto this nonsense. Unfortunately, a significant segment of the public gets lost in this swirl of reportage and blindly jumps on the mercantilist bandwagon. The mercantilist ideas have legs which lend support to Trump’s trade war. This is unfortunate since the trade war is a negative-sum game. Indeed, the International Monetary Fund estimates that the war’s cost to the global economy in 2020 could amount to $700 billion, <a href="https://www.nytimes.com/2019/10/08/us/politics/trump-trade-war-imf.html" target="_blank">a loss equivalent to the size of Switzerland’s economy</a>.</p> <p>Armed with economic principles and solid empirical evidence, Edward Li and I have been able to turn the conventional wisdom about the trade deficit on its head. We present the arguments and the facts in our article “The Strange and Futile World of Trade Wars,” which will appear in the Fall 2019 issue of the <a href="http://jacf-pub.com/" target="_blank"><em>Journal of Applied Corporate Finance</em></a>.</p> <p>Why are modern U.S. mercantilists so misguided? Today, their view of international trade and external accounts has its roots in how individual businesses operate. A healthy business generates positive free cash flows—revenues exceed outlays. If a business cannot generate positive free cash flows on a sustained basis or take on more debt or issue more equity to finance itself, then it will be forced to declare bankruptcy.</p> <p>Business leaders employ this general free-cash-flow template when they think about the economy and its external balance. For them, a negative external balance for the nation is equivalent to a negative cash flow for a business. In both cases, more cash is going out than is coming in.</p> <p>But this line of thinking represents a classic fallacy of composition. This is the belief that what is true of a part (a business) is true for the whole (the economy). Alas, economics is littered with fallacies. These cause businessmen and many others to confuse their own arguments about international trade and external balances beyond reason. In the end, though, many embrace mercantilist ideas and believe that the trade deficit is a problem that is caused by foreigners.</p> <p>For the mercantilists, the biggest troublemakers for the U.S. in recent decades have been Japan and China, the two largest contributors to the U.S. trade deficit. As indicated in the chart below, trade with Japan accounted for the lion’s share of the U.S. trade deficit during the 1980s and 1990s, with peaks of 56.4% of the total in 1981 and 58.4% in 1991. However, since the 1990s, China has overtaken Japan as the largest contributor to the U.S. trade imbalance.</p> <p><img data-src="https://specials-images.forbesimg.com/imageserve/5da38f8ecd594c000620f57d/960x0.jpg" class=" lozad" /></p> <p>Faced with those significant contributions—first by Japan and then China—the mercantilists, in an attempt to correct “the problem,” struck back. During the Reagan years, Japan was seen as an enemy that had to be dealt with—and it was. Indeed, the U.S. dealt with imports of Japanese automobiles harshly. In the face of great pressure, the Japanese agreed to a voluntary restraint agreement (VRA) to limit the export of their cars to the U.S. The Japanese VRAs on auto exports imposed costs on U.S. consumers of more than $1.1 billion per year in the 1980s, which amounted to about $240,000 for each job saved in the domestic auto industry. In Japan, however, the VRAs turned out to be a boon for Japanese companies: under the VRAs, Japanese automakers filled their U.S. export quota with higher-end cars that carried higher price tags and delivered larger profit margins.</p> <p>Washington also ramped up pressure on Japan to appreciate the yen relative to the dollar. An ever-appreciating yen would, according to its advocates, reduce Japan’s contribution to America’s trade deficit. The Japanese caved under this pressure, and the yen appreciated, moving from 360 to the greenback in 1971 to 80 in 1995. But this massive yen appreciation did not put a dent in Japan’s exports to the U.S., with Japan contributing more than any other country to the U.S. trade deficit until 2000 (see chart). Moreover, in April 1995, Secretary of the Treasury Robert Rubin belatedly realized that the yen’s great appreciation was causing the Japanese economy to sink into a deflationary quagmire. As a consequence, the U.S. stopped bashing the Japanese government about the value of the yen, and Secretary Rubin began to invoke his now-famous strong-dollar mantra.</p> <p>While Washington’s rhetoric towards Japan’s trade practices was one-sided and decidedly negative—Japan was presumed guilty of under-handed trade tactics—hardly a word was uttered in public about U.S. trade practices. However, there was plenty that was being uttered within the confines of the administration. I was staffing the Japanese trade portfolio at President Reagan’s Council of Economic Advisers (CEA). At every occasion possible, the CEA urged the U.S. to drop trade barriers that were actually restricting U.S. exports to Japan. Specifically, the CEA argued that the restrictions on the export of Alaskan oil to Japan and the bans on the export of logs cut on federal lands should be lifted.</p> <p>At the end of President Reagan’s second term, William A. Niskanen, who was a prominent member of the President’s Council of Economic Advisers, wrote unapprovingly that: “The consistent goal of the president was free trade, both in the United States and abroad. In response to domestic political pressure, however, the administration imposed more new restraints on trade than any administration since Hoover.”</p> <p>Even though Japan’s contribution to America’s trade deficit eventually began to decline, the overall U.S. trade deficit continued to expand. So, the protectionists’ policies that were aimed at Japan failed to do the trick that the mercantilists hoped for.</p> <p>After the Reagan administration’s confrontations with Japan in the 1980s, discussion of international trade issues became less heated (with the exception of the rhetoric of third-party Presidential candidates Ross Perot in 1992 and 1996 and Patrick Buchanan in 2000), and policy generally favored the elimination of trade barriers.</p> <p>Of course, that all changed with the arrival of President Trump and his entourage of mercantilists. By the time the Trump administration took office, China had overtaken Japan as the major contributor to the U.S. trade deficit. Today, China’s 48% share of the total U.S. trade deficit dwarfs Japan’s 7.7%. So, given President Trump’s mercantilist mentality, he has taken aim at China. The President has imposed tariffs and quotas on virtually everything under the sun. He has even gone so far as to “order” U.S. companies to stop doing business in China under the questionable cover of the International Emergency Economic Powers Act of 1977. As a consequence, the U.S. is deeply engaged in a trade war with China. Remarkably, however, this war has generated nothing in the way of reductions in the total trade deficit; in fact, the overall U.S. trade deficit has increased significantly since the arrival of the Trump administration. As the chart shows, China’s share of that increased deficit has also slightly increased.</p> <p>Unfortunately, mercantilists pay no attention to history and sound economics. As long they hold sway, there will be never-ending trade wars with losers on all sides—a negative-sum game.</p> </div> Sun, 13 Oct 2019 11:02:17 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/trade-war-never-stops U.S. Trade Deficit Is Homegrown https://www.cato.org/publications/outside-articles/us-trade-deficit-homegrown Tue, 01 Oct 2019 13:50:34 -0400 Steve H. Hanke, Edward Li https://www.cato.org/publications/outside-articles/us-trade-deficit-homegrown Trump: Transform the U.S. Strategic Petroleum Reserve into an Oil Bank https://www.cato.org/publications/commentary/trump-transform-us-strategic-petroleum-reserve-oil-bank Steve H. Hanke <div class="text-default"> <p>Following the attacks on key crude oil production facilities in Saudi Arabia, President Donald Trump announced the authorization of the release of oil from the U.S. Strategic Petroleum Reserve (SPR) to keep the market well supplied. This move changes nothing in the way the SPR is governed. The market, not the President, should determine the release of the massive SPR.</p> </div> , <div class="text-default"> <p>Government stockpiles are nothing new. The U.S. has had a long and fatal attraction to hoarding commodities for national emergencies. Indeed, the government has squirreled away everything from aluminum to zinc. But, the mother of all these commodity hoards is the SPR. Established in December 1975, it consists of five underground storage facilities hollowed out from salt domes in Texas and Louisiana. At present, they hold 645 million barrels of crude oil, over 1.5 times greater than the amount in private U.S. inventories. The massive SPR inventory would fully supply U.S. crude consumption for almost an entire month.</p> <p>With an average price paid of $29.70 per barrel of oil, the current SPR inventory has cost the U.S. government $19.2 billion to fill. Even at today’s market prices, the increased value of this crude inventory does not make up for the opportunity costs of carrying it for so long. This is all just a drop in the bucket when compared to the capital costs of constructing and maintaining what is probably the greatest white elephant in the United States.</p> <p>The SPR &mdash; like the other government stockpile programs &mdash; has had a stormy history. One of the more outrageous episodes occurred in late 1978. The Saudis cut a deal with the Carter administration to stabilize oil prices by increasing their output. In return, the U.S. agreed to stop purchasing oil destined for its stockpile, giving the Saudis de facto control of the SPR. The Saudis knew the oil markets and the importance of seemingly small changes in the demand for inventories. They also knew that the Americans would keep their end of the bargain and that they would not.</p> <p>In the 44 years following its creation, the SPR has only been tapped three times for emergency purposes: during the Persian Gulf War in 1991, following Hurricane Katrina in 2005, and in response to NATO’s involvement in the Libyan Civil War in 2011. Even though the SPR has cost American taxpayers a fortune and has rarely been used, in the minds of the public and the politicians, the SPR remains an important strategic asset. Therefore, for the time being, we shall assume that the United States will be stuck with SPR, and the best that can be done is to improve its operation by transforming it into an oil bank.</p> <p>Most oil is sold under fixed-priced contracts. In normal times, small excesses and deficits are absorbed by changes in private inventories. When the temporary supply-demand imbalances are too large for inventory absorption, they show up in the spot market for oil, where flexible prices clear the market.</p> <p>When potential supply disruptions enter the picture &mdash; as they have done with increasing frequency since 1990 &mdash; panic buying sets in. Nobody wants to be caught short, and the precautionary demand for more storage shoots up. Contrary to popular characterizations, the ensuing price increases are primarily driven by changes in the demand for storage, not supply problems.</p> <p>For all intents and purposes, the oil being held in the SPR is not an realistic alternative to private inventories. This is because its eventual release is at the discretion of the President &mdash; in other words, tangled up in politics. In November 2001, George W. Bush ordered the U.S. government to purchase oil and fill its reserve to full capacity, which at the time was 700 million barrels and is presently 727 million barrels. By August 2005, the fill order was completed, with the reserve accounting for 69.6% of U.S. oil inventories. Today, the reserve, now at 645 million barrels, accounts for 60.7% of U.S. oil inventories. Even with the huge stock of oil being hoarded by the government, the private sector has seen the need to increase their oil inventories, with private stocks increasing by 42.1% since George W. Bush gave his fill order.</p> <p>For the SPR to better serve the American economy, the release rules should be removed from politics and replaced by a market-based approach. Market-based release rules would transform the SPR into an oil bank. This bank would provide the country with a substantial precautionary inventory of oil, generate revenue to defray some of the government's stockpiling costs, smooth out crude oil price fluctuations and push down spot prices relative to prices for oil to be delivered in the future.</p> <p>How would an oil bank work? The government would sell out-of-the-money call options on its stockpiles. It might, say, sell December 2020 oil options with a strike price of $60 a barrel. If the price surged above that level, the option buyer would exercise and take delivery of crude oil from the government's stockpile. If the price never reached $60, the option would expire worthless, and no crude oil would be released. Thus, the market would decide when the oil gets released to refineries.</p> <p>The sale of call options on the SPR inventory would all but eliminate panic-driven buying and stockpiling. Indeed, the SPR options would liquify oil that is now, in effect, frozen solid. And with that, a giant pool of insurance would be created. Let the market, not politicians, determine the flow of oil from the SPR. Lower, more stable prices would ensue.</p>Hank </div> Fri, 27 Sep 2019 14:57:02 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/trump-transform-us-strategic-petroleum-reserve-oil-bank The Saudi Oil Shock: Who Wins, Who Loses https://www.cato.org/publications/commentary/saudi-oil-shock-who-wins-who-loses Steve H. Hanke <div class="lead text-default"> <p>On September 14th, drones targeted Saudi Arabia's Abqaiq oil refinery and Khurais oil field. The strikes reportedly knocked out more than half of Saudi Arabia's total output. That amounts to a whopping 6-7% of the global daily oil supply. Not surprisingly, before the dust had settled, the press sounded an alarm and spread fear. Then, President Trump jumped in, claiming the attack “won't affect us and ultimately I don't think it will affect the world either.” Well, let’s take a look at the data.</p> </div> , <div class="text-default"> <p>Brent crude prices surged by 15%, from $60/bbl on September 13th to $69/bbl on the 16th, the first trading day after last weekend’s drone attacks. Brent crude is now trading at $65/bbl. While a significant increase, the response to this incident has kept oil in what Arend Kapteyn of the Union Bank of Switzerland (UBS) deems to be in a safe zone ($50-$75/bbl). When prices are in this sweet spot, the “gains” and “losses” from oil price changes are roughly balanced, so the global economy can hum along without missing a beat.</p> <p>But, even though we might still be operating in the oil-price sweet spot, crude oil prices are &mdash; as a result of a big chunk of the Saudi’s capacity being temporarily knocked out &mdash; higher than they would have been absent the drone attacks. Furthermore, the repairs on the Saudi facilities will most likely not be as straightforward as many seem to think. The Abqaid facility is highly complex and specialized. Indeed, even planned maintenance at Abqaid can take up to three months. In consequence, there aren’t off-the-shelf replacement parts. Repairs, therefore, will take an extended period of time And, if that’s not bad enough, there could be further attacks on Saudi facilities, which appear to be vulnerable. Indeed, the markets have already priced in higher future prices, as reflected in the forward curves that contain prices for future crude delivery.</p> <p>The specter of elevated crude prices raises the obvious question: what countries are the biggest winners and losers? To answer that, I use results from a UBS modeling exercise. The table below shows the negative effect that 10% price increases (starting at $50/bbl and moving up to $100/bbl) would have on the current account balances of oil consuming countries. The numbers are given in changes in basis points as a percent of GDP. So, for India, a 10% price increase would result in an increase in the Indian current account deficit of one half a percent (50 basis points) of GDP.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="656" height="794" alt="Hanke Forbes 2019 Tabe" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/Screen%20Shot%202019-09-30%20at%202.27.07%20PM.png?itok=Vl5PecaG 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/Screen%20Shot%202019-09-30%20at%202.27.07%20PM.png?itok=JQh7tAxy 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/Screen%20Shot%202019-09-30%20at%202.27.07%20PM.png?itok=Vl5PecaG" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>Let’s take a look at the two big losers: India and Turkey.</p> <p>India imports over 80% of the oil it consumes, making it one of the largest importers of oil in the world. While the world’s economies have, on average, become significantly more energy efficient over time, India’s use of oil per unit of GDP has hardly changed in over 50 years and is well above the global average. So, when crude prices spike, India’s external balance (read: current account) takes a hit, and the rupee slumps.</p> <p>Turkey imports almost 85% of its oil. Like India, each 10% increase in the price of crude oil would result in a half a percent increase in its current account deficit as a percent of GDP.</p> <p>Turning to a few countries that benefit from price increases, it turns out that Russia will be a big winner. As indicated in the table below, Russia’s external balance improves by 1.2% of GDP for each 10% increase in the price of oil.</p> <p>So, the recent attacks on the Saudi’s oil facilities promise to elevate oil prices, but leave them, for the time being, in the so-called sweet spot, with no particular world disruptions. I wonder if President Trump had studied the UBS oil-price model? We will never know. But, we do know that India and Turkey will take hits and that Russia will be a big winner. This promises to throw storm clouds over the Indian rupee and Turkish lira and sunshine over the Russian ruble.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="651" height="492" alt="Forbes September 22 2019 Table 2" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/Screen%20Shot%202019-09-30%20at%202.35.04%20PM.png?itok=1edm5IqA 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/Screen%20Shot%202019-09-30%20at%202.35.04%20PM.png?itok=YkTzzGz3 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/Screen%20Shot%202019-09-30%20at%202.35.04%20PM.png?itok=1edm5IqA" typeof="Image" /> </div> </figure> Sun, 22 Sep 2019 14:30:44 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/saudi-oil-shock-who-wins-who-loses Elizabeth Warren’s Plan to Keep American Indians Wards of the State https://www.cato.org/publications/commentary/elizabeth-warrens-plan-keep-american-indians-wards-state Steve H. Hanke <div class="lead text-default"> <p>As Senator Elizabeth Warren makes her bid to become the Democratic Party’s candidate for President of the United States in 2020, she has worked to make amends with America’s Indians for her false claims of Cherokee blood. In August, the Senator offered her public apology at a Native American forum in Sioux City, Iowa. She also released a massive legislative proposal—“<a href="https://www.warren.senate.gov/imo/media/doc/Legislative%20proposal%20-%208.15.2019.pdf" target="_blank">Honoring Promises to Native Nations Act</a>” — with Congresswoman Deb Haaland, a Democrat from New Mexico. The proposal comes with an eye-popping price tag (read: big bucks for Native Americans). With that, all was forgiven. The hatchet was buried.</p> </div> , <div class="text-default"> <p>Before I comment further on the substance of Senator Warren’s proposals, some background about American Indians is in order. Indeed, the stage must be set. There are roughly 2.6 million American Indians in the United States. Twenty-one percent reside on reservations. Indian reservations cover a total of 56.2 million acres, an area that’s about the size of Idaho. The reservations are held in trust by the federal government. They are managed by the Bureau of Indian Affairs (BIA) in Washington, D.C. in conjunction with local tribal councils.</p> <p>Even though the reservations have alleged broad powers of sovereign, self-governing “nations,” the federal government, through the BIA, has traditionally played a large role in all aspects of American Indian life. Indeed, the economic affairs of Indian tribes are micro-managed by the BIA. The BIA typically negotiates contracts, determines natural resource use, makes investment decisions, manages tribal financial records, and determines tribal employment policies. As an indicator of the government’s involvement in Indian affairs, consider that the federal government spends over $20 billion annually on American Indians. This amounts to roughly $7,605 for each Native American.</p> <p>Economic development on Indian reservations, when it occurs, is limited, with the gambling boom on some reservations representing an exception. Indian reservations resemble many less developed countries. Unemployment rates for Indians residing on reservations are, on average, about three times higher than the overall U.S. rate. Moreover, government make-work programs account for a great deal of the so-called employment. Median family incomes are about 53.7% of the national average, with 37.9% of all Indians living in poverty—over 2.5 times the U.S. rate. Not surprisingly, American Indians suffer many of the ills that accompany poverty: high rates of alcoholism, criminality, familial instability, and general poor health. If this were not enough, corruption is widespread on reservations.</p> <p>Indian reservations represent man-made disasters of the first order. Communal ownership of reservations and widespread federal government failure have resulted in this sad state of economic affairs. There have been numerous specific events that have created this tragedy for American Indians. One occurred back in 1831, when the U.S. Supreme Court concluded that the relationship between the federal government and the Indian tribes was that of a “ward to his guardian.” With that, the die was cast. The Indians were deemed to be mere wards of the State — dependencies of the federal government.</p> <p>The federal government imposes many rules and regulations on its wards. As for the reservations themselves, they are communally owned and operated under the collective eye of tribal councils. Private ownership is scarce as hens’ teeth in Indian country. This institutional setup results in a massive amount of waste. Indian grazing lands are typically overused, while timberlands and mineral lands are underused. As for the Indians themselves, there are few incentives to save and invest in communally-owned resources. So, there is little investment.</p> <p>To understand the waste, fraud, and abuse that occur on communal lands, it is instructive to consider why private lands are used in a more economically efficient manner. Private owners stand to gain enhanced wealth from the wise care of and prudent improvements on their property, reductions in production costs, proper land use, and the like. Indeed, private owners are “residual claimants” who have a strong interest in maximizing the residual profit or capital gain arising from land ownership. Communal owners, by contrast, lack a “residual claim” in any meaningful sense. Consequently, communal lands are used in an uneconomic manner. This observation is, of course, not new. In 1776, Adam Smith concluded in<em>The Wealth of Nations</em>that, “The attention of the sovereign can be at best a very general and vague consideration of what is likely to contribute to the better cultivation of the greater part of his dominions. The attention of the landlord is particular and minute consideration of what is likely to be the most advantageous application of every inch of ground upon his estate.”</p> <p>To remedy the economic maladies that afflict Indians, a Presidential Commission on Indian Reservation Economies recommended a sweeping privatization program in 1984. As the Commission put it: “Private ownership of tribal enterprises contemplates ownership of the means of production, private management, for-profit motivation and freedom for individual Indians or groups of Indians who have or share an interest in participating in business activity on an Indian reservation.”</p> <p>If implemented, the Commission’s privatization proposals would release American Indians from being wards of the State. They could function as property owners, as do all other Americans.</p> <p>This brings me to Senator Warren’s proposals. The Senator begins by correctly observing that the federal government has not lived up to its promises to American Indians. Indeed, when it comes to treaties and obligations, there has been a massive failure of the federal government to deliver—a classic case of government failure.</p> <p>Senator Warren moves from that correct and obvious observation about government failure to a non sequitur. Yes. She proposes more of the same, arguing that it’s all a matter of more money. Her proposals do nothing more than rearrange the chairs on the Titanic. They fail to correct the problem. That problem is communal ownership of Indian lands and businesses and the massive government meddling in the lives of American Indians, who are currently deemed little more than wards of the State.</p> <p>If all this isn’t bad enough, it’s clear that Senator Warren not only wants to keep the Indians as wards, but she wants the rest of us to become wards of the State, too. Indeed, that’s where her costly “Medicare for All” and social security proposals would leave us.</p> </div> Sun, 15 Sep 2019 12:28:16 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/elizabeth-warrens-plan-keep-american-indians-wards-state Worried About A Recession? Relax. https://www.cato.org/publications/commentary/dont-worry-about-recession Steve H. Hanke <div class="lead text-default"> <p>Everyone seems to be wringing their hands about what they fear is an oncoming recession. Indeed, as a sign of the level of the public&rsquo;s angst, <a href="https://www.economist.com/finance-and-economics/2019/08/22/the-onset-of-a-downturn-is-as-much-a-matter-of-mood-as-of-money" target="_blank"><em>The Economist </em>magazine reports</a> that Google searches related to the word &ldquo;recession&rdquo; have surged.</p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>While the daily drumbeat of negative news&mdash;particularly that which is related to President Trump's counter-productive and futile trade war with China&mdash;is worth paying attention to, it is somewhat of a sideshow.</p> </div> </div> </aside> , <div class="text-default"> <p>If that wasn&rsquo;t enough evidence of the hand wringing, the Chairman of President Trump&rsquo;s Council of Economic Advisers, the respected Tomas Philipson, recently indicated that he was worried about the steady negative drumbeat in the press: that a recession might be just around the corner. Philipson put his finger on the problem when he said, &ldquo;The way the media reports the weather won&rsquo;t impact whether the sun shines tomorrow. But the way the media reports on our economy weighs on consumer sentiment, which feeds into consumer purchases and investments.&rdquo;</p> <p>Philipson understands very well that negative news can become part of a negative feedback loop that can result in a plunge in the public's state of confidence and a recession. He also knows how to follow metrics that gauge the public's expectations and confidence in the economy, like the University of Michigan's Consumer Sentiment index. The chart below shows the course of that index. The last reading on the chart is for August. It is notable that Consumer Sentiment took a dive, falling from 98.4 in July to 89.8 in August. That's the lowest reading since October 2016. It's clear that the President's Council of Economic Advisers took note, causing Chairman Philipson to spring into action.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="304" alt="hanke-market-1-img" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-market-1-img.jpg?itok=PKxHtLxV 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/hanke-market-1-img.jpg?itok=6j4zUM-s 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-market-1-img.jpg?itok=PKxHtLxV" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>The state of confidence argument which sometimes flies under the &ldquo;animal spirits&rdquo; rubric goes back to earlier ideas about the business cycle; ideas that stress the importance of changes in business sentiment. For example, members of the Cambridge School of Economics, which was founded by Alfred Marshall (1842-1924), all concluded that fluctuations in business confidence are the essence of the business cycle. As John Maynard Keynes argued in the <em>General Theory</em>:</p> </div> , <blockquote class="blockquote"> <div> <p>&ldquo;The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analyzed it carefully and have been content, as a rule, to discuss it in general terms.&rdquo;</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p>Frederick Lavington (1881-1927), a Fellow of Emmanuel College and the most orthodox of the Cambridge economists, went even further than Keynes. In his 1922 book, <em>The Trade Cycle</em>. Lavington concluded that, without a &ldquo;tendency for confidence to pass into errors of optimism or pessimism,&rdquo; there would not be a business cycle.</p> <p>But, this animal spirits approach to the business cycle, while it contains a grain of salt, fails to offer much of a theory of national income determination, as Keynes himself concluded. The monetary approach fills that void.</p> <p>The monetary approach posits that changes in the money supply, broadly determined, cause changes in nominal national income and the price level. Sure enough, the growth in the supply of broad money and nominal GDP are closely linked.</p> <p>So, just where do things stand in the U.S.? As shown in the chart below, the growth rate of the money supply, broadly measured by Divisia M4, is growing at 5.04%/yr. That puts it above the trend rate since 2003 of 3.81%/yr. And what&rsquo;s more, the broad money growth rate is right in line with the &ldquo;golden growth&rdquo; rate. That&rsquo;s the rate of growth in the money supply that would allow the Fed to hit its inflation target of 2%/yr. The money supply, broadly measured, is in the sweet spot: not too hot, not too cold. Also, private credit is growing at 5.57%/yr, which is very close to its trend rate since 2003 of 5.63%/yr.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="506" alt="hanke-market-2-2-img" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-market-2-2-img.jpg?itok=3636dpD0 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/hanke-market-2-2-img.jpg?itok=gwhKY46I 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-market-2-2-img.jpg?itok=3636dpD0" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>While the daily drumbeat of negative news—particularly that which is related to President Trump&rsquo;s counter-productive and futile trade war with China—is worth paying attention to, it is somewhat of a sideshow. The main event is money. Money dominates, and at present, it&rsquo;s not too hot, not too cold—about right. Perhaps that&rsquo;s why Fed Chairman Jerome Powell, while in Zurich yesterday, confidently said, &ldquo;Our main expectation is not at all that there will be a recession.&rdquo; Powell could have added the word: &ldquo;Relax.&rdquo;</p> </div> Sat, 07 Sep 2019 10:14:46 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/dont-worry-about-recession Steve H. Hanke discusses the Argentine peso on The Gold Newsletter podcast https://www.cato.org/multimedia/media-highlights-radio/steve-h-hanke-discusses-argentine-peso-gold-newsletter-podcast Tue, 03 Sep 2019 11:02:00 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-radio/steve-h-hanke-discusses-argentine-peso-gold-newsletter-podcast Hayek on Argentina’s Capital Controls https://www.cato.org/publications/commentary/hayek-argentinas-capital-controls Steve H. Hanke <div class="text-default"> <p>Yesterday, President Mauricio Macri chose to impose capital controls on Argentina. Since being elected, Macri has been reluctant to reform — a gradualist, “do-nothing” president. But, when backed into a corner of his own making, he acts as if he is bent on committing political suicide. First, he called in the firemen from the International Monetary Fund — a rightfully despised organization in Argentina. And now, he has pulled the trigger on capital controls.</p> <p>What would Nobelist Friedrich Hayek say about the imposition of capital controls and restrictions on the convertibility of Argentina’s junk currency—the peso?</p> <p>Currency convertibility is a simple concept. It means residents and nonresidents are free to exchange domestic currency for foreign currency. However, there are many degrees of convertibility, with each denoting the extent to which governments impose controls on the exchange and use of currency.</p> <p>The pedigree of exchange controls can be traced back to Plato, the father of statism. Inspired by Lycurgus of Sparta, Plato embraced the idea of an inconvertible currency as a means to preserve the autonomy of the state from outside interference.</p> <p>So, the temptation to turn to exchange controls in the face of disruptions caused by hot money flows is hardly new. Tsar Nicholas II first pioneered limitations on convertibility in modern times, ordering the State Bank of Russia to introduce, in 1905-06, a limited form of exchange control to discourage speculative purchases of foreign exchange. The bank did so by refusing to sell foreign exchange, except where it could be shown that it was required to buy imported goods.</p> <p>Otherwise, foreign exchange was limited to 50,000 German marks per person. The Tsar’s rationale for exchange controls was that of limiting hot money flows, so that foreign reserves and the exchange rate could be maintained. The more things change, the more they remain the same.</p> <p>Before more politicians come under the spell of exchange controls, they should reflect on the following passage from Hayek’s 1944 classic,<a href="https://mises.org/library/road-serfdom-0" target="_blank"><em>The Road to Serfdom</em></a>:</p> </div> , <blockquote class="blockquote"> <div> <p>"The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape-not merely for the rich but for everybody."</p> </div> </blockquote> <cite> </cite> , <div class="text-default"> <p>Hayek’s message about convertibility has regrettably been overlooked by Argentina’s economists, who have a fatal attraction to nutty ideas. Exchange controls are nothing more than a ring fence within which governments can expropriate their subjects’ property. Open exchange and capital markets, in fact, protect the individual from exactions, because governments must reckon with the possibility of capital flight.</p> <p>From this it follows that the imposition of exchange controls leads to an instantaneous reduction in the wealth of the country, because all assets decline in value. To see why, it is important to understand how assets are priced. The value of any asset is the sum of the expected future installments of income it generates discounted to the present value. For example, the price of a stock represents the value to the investor now of his share of the company’s future cash flows, whether issued as dividends or reinvested. The present value of future income is calculated using an appropriate interest rate that is adjusted for the various risks that the income may not materialize.</p> <p>When convertibility is restricted, risk increases, because property is held hostage and is subject to a potential ransom through expropriation. As a result, the risk-adjusted interest rate employed to value assets is higher than it would be with full convertibility. Investors are willing to pay less for each dollar of prospective income, and the value of property is less than it would be with full convertibility.</p> <p>This result, incidentally, is the case even when convertibility is allowed for profit remittances. With less than full convertibility, there is still a danger the government will confiscate property without compensation. That explains why foreign investors are less willing to invest new money in a country with such controls, even with guarantees on profit remittances.</p> <p>Investors become justifiably nervous when they expect that a government may impose exchange controls. Settled money becomes “hot” and capital flight occurs. Asset owners liquidate their property and get out while the getting is good. Contrary to popular wisdom, restrictions on convertibility do not retard capital flight, they promote it. Macri’s capital controls have destroyed vast amounts of Argentina’s wealth and further damaged the country’s dead-beat reputation.</p> </div> Mon, 02 Sep 2019 10:27:56 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/hayek-argentinas-capital-controls Trump and the Business Roundtable Create Unwanted Regime Uncertainty https://www.cato.org/publications/commentary/trump-business-roundtable-create-unwanted-regime-uncertainty Steve H. Hanke <div class="text-default"> <p>Last week, the Business Roundtable joined the ever-present Donald J. Trump in creating unwanted regime uncertainty. President Trump displayed his mercantilist machismo by threatening to go to the mat with China and America’s businesses. He promised more tariffs on China if Beijing did not comply with his demands. Then, the President turned his fury on America’s businesses; he ordered them to stop doing business with the Chinese. But, that wasn’t all. Trump also lashed out at the Chairman of the U.S. Federal Reserve Jerome Powell, labeling him an “enemy” and comparing him to Trump’s trade nemesis President Xi Jinping of China. Not surprisingly, the markets plunged.</p> <p>If that wasn’t enough, the Business Roundtable launched a major attack on property rights, the bedrock of the capitalist system. In a stunning new mission statement, the Roundtable, which represents almost 200 of America’s blue-chip companies, downgraded shareholders. According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five stakeholders, alongside customers, workers, suppliers, and communities that will call the tune for corporations.</p> <p>Just what do President Trump and members of the Business Roundtable have in common? Well, they are all businessmen. And, when it comes to economics and economic policy, businessmen are notorious for talking nonsense. While businessmen readily accept the expertise of lawyers, engineers, and those from other professions, they often reject professional opinion offered by professional economists. And why not? After all, as they say, every man is an economist. So, when it comes to economics, businessmen have and express their own ideas and theories—often fallacious ideas and theories. That’s why solid training in economics is not simply to acquire a set of readymade answers to economic questions, but to learn how to avoid being deceived and bamboozled by businessmen.</p> <p>When it comes to the Business Roundtable’s most recent manifesto, it appears that the authors simply suffer from a case of economic illiteracy, which is not uncommon in the business world. Indeed, the great Austrian economist Joseph Schumpeter concluded in his 1942 classic<em><a href="https://www.amazon.com/Capitalism-Socialism-Democracy-Perennial-Thought/dp/0061561614" target="_blank">Capitalism, Socialism, and Democracy</a></em>that businessmen would “never put up a fight under the flag of their own ideals and interest.” Schumpeter saw clearly that businessmen would not be the ones to defend capitalism. Indeed, he concluded that they, through their ignorance and cowardice, would assist those who wished to destroy capitalism. In 1947, when Schumpeter’s<em><a href="https://www.amazon.com/Capitalism-Survive-Joseph-Alois-Schumpeter/dp/1891396765" target="_blank">Can Capitalism Survive?</a></em>was published, he took businessmen to the cleaners once again. He also continued to harbor gloomy prospects for capitalism’s survival.</p> <p>And as for President Trump—as well as many businessmen, from Secretary of Commerce Wilbur Ross to those who man main street America—he has a view about international trade, particularly the U.S. trade balance. Their wrongheaded view of international trade and the trade balance has its roots in how individual businesses operate. A healthy business generates positive free cash flows—revenues exceed outlays. If a business cannot generate positive free cash flows on a sustained basis and cannot take on more debt or issue more equity to finance itself, then it will eventually be forced to declare bankruptcy.</p> <p>Businessmen naturally employ this general free cash-flow template when they think about the economy and its external balance. For them, a negative trade balance for the nation is equivalent to a negative cash flow. In both cases, more cash is going out than is coming in.</p> <p>But, this line of thinking is fallacious. Indeed, it represents a classic fallacy of composition. This fallacy is the belief that what is true of a part (a business) is true for the whole (the economy). Alas, economics is littered with fallacies. These cause businessmen to confuse their own arguments about international trade and trade balances, as well as other people’s minds, almost beyond reason.</p> <p>In reality, the negative trade balance in the United States is not a “problem” caused by nefarious activities by foreigners. No. The U.S. negative trade balance, which the U.S. has recorded every year since 1975, is not a problem. Moreover, it is made in the U.S.A., caused by a savings deficiency (read: the U.S. fiscal deficit).</p> <p>So, where did the Trump trade tirades and the Business Roundtable’s new anti-capitalist mission statement leave us? Well, it left us with plenty of unwanted regime uncertainty. Just what is regime uncertainty? Robert Higgs in<a href="https://www.independent.org/store/book.asp?id=115" target="_blank"><em>Taking a Stand: Reflections on Life, Liberty, and the Economy</em></a>(2015) answers this question. In 1997, Higgs first introduced the concept of “regime uncertainty” to explain the extraordinary duration of the Great Depression. Higgs’ regime uncertainty is, in short, uncertainty about the course of economic policy — the rules of the game concerning taxes and regulations, for example. These rules of the game affect the net benefits and free cash flows investors derive from their property; the rules affect the security of their property rights. So, when the degree of regime uncertainty increases, investors’ risk-adjusted discount rates increase, and their appetites for making investments diminish.</p> <p>As it turns out, Scott R. Baker of Northwestern University, Nicholas Bloom of Stanford University and Steven J. Davis of the University of Chicago have developed a measure that serves as a proxy for regime uncertainty: the “Global Economic Policy Uncertainty Index.” The chart below shows the course of this index.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="356" alt="Hanke Forbes Image August 26 2019 1" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-forbes-8-26-19-1.png?itok=p9L7Hivo 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/hanke-forbes-8-26-19-1.png?itok=vZ7u4G9Q 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-forbes-8-26-19-1.png?itok=p9L7Hivo" typeof="Image" /> </div> </figure> , <div class="text-default"> <p>It’s clear that the Global Economic Policy Uncertainty Index is elevated. While the gold bugs love it, most others do not.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <img width="700" height="339" alt="Hanke Forbes August 26 2019 Image 2" class="lozad component-image" data-srcset="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-forbes-8-26-19-2.png?itok=TMu6N9_W 1x, /sites/cato.org/files/styles/pubs_2x/public/2019-09/hanke-forbes-8-26-19-2.png?itok=_t9FJAjj 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2019-09/hanke-forbes-8-26-19-2.png?itok=TMu6N9_W" typeof="Image" /> </div> </figure> Mon, 26 Aug 2019 10:43:37 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/trump-business-roundtable-create-unwanted-regime-uncertainty Steve H. Hanke discusses Universal Time Zones on CNN's Fareed Zakaria GPS https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-universal-time-zones-cnns-fareed-zakaria-gps Sun, 25 Aug 2019 12:05:00 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-universal-time-zones-cnns-fareed-zakaria-gps Steve H. Hanke discusses a Universal Calendar on CNN's Fareed Zakaria GPS Web Extra https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-a-universal-calendar-on-cnns-fareed-zakaria-gps-web-extra Sun, 25 Aug 2019 11:49:01 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-a-universal-calendar-on-cnns-fareed-zakaria-gps-web-extra Steve H. Hanke discusses the economy and the Jackson Hole conference on Hearst TV https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-economy-jackson-hole-conference-hearst-tv Fri, 23 Aug 2019 11:53:00 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-economy-jackson-hole-conference-hearst-tv Steve H. Hanke discusses the Fed on Yahoo! Finance https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-fed-yahoo-finance Thu, 22 Aug 2019 11:24:00 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-fed-yahoo-finance Financial Miscalculations — A Permanent Solution https://www.cato.org/publications/commentary/financial-miscalculations-permanent-solution Steve H. Hanke <div class="lead text-default"> <p>The Gregorian calendar has been around since 1582. Even though it is widely used throughout the world, it contains flaws that give rise to confusion and financial miscalculations. The replacement of the Gregorian calendar with the Hanke-Henry Permanent Calendar (HHPC) will throw confusion and financial miscalculations into the dustbin.</p> </div> , <div class="text-default"> <p>One set of problems thrown up by the Gregorian calendar is the so-called “day-count problem.” For example, to determine how much interest accrues on financial instruments — like bonds, mortgages, swaps, and forward-rate agreements — day counts, the number of days interest accrues, are required. With the Gregorian calendar, complexities and anomalies exist that create difficulties, which give rise to day-count problems.</p> <p>In an attempt to maneuver around these difficulties and simplify accrued interest calculations, a variety of conventions have been created. For U.S. government bonds, the interest earned between two dates is computed based on the actual number of days between interest payments. This is called the actual/actual convention. It’s simple enough. But, that’s not the end of the story. In the interest of simplicity and convenience, U.S. corporate, municipal, and many agency bonds use a 30/360 day-count convention. This artificial convention assumes that each month has 30 days and all years have 360 days, even though this is simply not true. These different day-count conventions have been spawned by the Gregorian calendar. They create confusion, errors, inefficiencies, and arbitrage opportunities.</p> <p>It would seem that a swap between the two companies is a straightforward transaction. But, it’s not. Yet another day-count convention must be introduced: the actual/360 day-count convention. This is the convention used for all U.S. dollar and euro-denominated money market instruments as well as money market instruments quoted at the LIBOR rate. So, floating-rate payments for U.S. dollar and euro-denominated swaps use the actual/360 day-count convention. Conversely, fixed-rate instruments denominated in the U.S. dollar or the euro use the 30/360 day-count convention. So, for swaps, a fixed-rate payment calls for an entirely different day-count convention than a floating-rate payment. Therefore, additional calculations must be made to ensure that the payments required for both companies engaging in the swap are comparable.</p> <p>Multiple day-count conventions clearly make for tedious calculations and room for plenty of errors. Indeed, the confusion, miscalculations, and errors associated with the use of multiple and seemingly arbitrary day-count conventions that are spawned by the Gregorian calendar cost time and money. But, there is a solution: a permanent calendar that I, along with my Johns Hopkins colleague and Academy Professor of Astronomy Richard Conn “Dick” Henry, developed. It’s the Hanke-Henry Permanent Calendar (HHPC). When it replaces the Gregorian calendar, the errors thrown up by the Gregorian calendar will be history.</p> <p>The HHPC adheres to the most basic tenet of a fixed calendar: every date falls on the same day of the week every year — forever. For example, New Year’s Day always fall on a Monday, and birthdays always fall on the same day of the week—forever. The HHPC divides each year into four three-month quarters. The first two months of each quarter contain 30 days; the third month of each quarter contains 31 days. So, each quarter contains 91 days, resulting in a 364-day year comprised of 52 seven-day weeks. The uniform, 91-day quarters are important for quarterly business financial reporting. And, the seven-day weeks turn out to be another vital feature of the HHPC. They preserve the seven-day Sabbath cycle. So, the HHPC abides by the Fourth Commandment and avoids the major ecclesiastical objections that have doomed all other attempts at calendar reform.</p> <p>With the adoption of the Hanke-Henry Permanent Calendar, the multiple, artificial day-count conventions will no longer be needed. Indeed, they will be eliminated and replaced with one standard actual/actual convention. And, with that, interest will always be accrued on the same basis for all financial instruments.</p> <p>In addition to solving the accrued interest day-count problem, the HHPC solves other financial problems associated with the Gregorian calendar. With the Gregorian calendar, each year (except leap year) has 365 days. Because each year contains an odd number of days, the number of days contained in each quarter vary. This is confusing and creates errors for businesses and analysts who must reconcile internal accounting procedures with external reporting requirements.</p> <p>With the Gregorian calendar, not only do the number of days in a quarter vary, but the number of high-sales traffic days vary, too. Retailers are most susceptible to this Gregorian calendar quirk because weekends and holidays account for a significant portion of their sales. In consequence, problems arise when analysts make sales comparisons across quarters and years where the number of high-traffic, weekend days differ between periods, or where important holidays don’t align evenly.</p> <p>The Hanke-Henry Permanent Calendar solves these day-count problems, too. The HHPC contains consistent 91-day quarters. In addition, it contains the same number of all-important weekend days each quarter. As for holidays, with the HHPC, they predictably fall on the same date and day of the week year-after-year. For example, seven existing federal holidays fall on Mondays. The HHPC also pins down floating holidays, like Memorial Day, which will eternally fall on Monday, May 27th, and Labor Day, which will fall on Monday, September 4th—forever. The calendar places both Christmas Eve and New Year’s Eve on Sundays. So, the HHPC facilitates sales comparability across quarters and years.</p> <p>The Gregorian calendar not only results in a varying number of days for each quarter, but also a varying number of weeks. This creates another set of problems. Many companies define their fiscal quarters as 13-week periods instead of three calendar months. This makes for a 52-week fiscal year with 364 days. But, it leaves out one day a year (the 365th day) and two days during a leap year. To reconcile a company’s fiscal years with the Gregorian calendar, an extra week is added every five or six years to compensate for days that are left out each year with the 52-week, fiscal-year format.</p> <p>Interestingly, there is no particular rhyme or reason as to when companies add back the extra week. While all companies add an extra week every five or six years, they do not do so during the same quarters, or even during the same sequence of years. Just where the extra week is placed on the calendar for any particular year is at the discretion of each company and is arbitrary. This ad hoc practice of adding weeks leads to confusion and accounting errors for analysts and investors.</p> <p>Apple provides illuminating examples. Like most other companies, Apple defines its fiscal quarters in 13-week periods and adds an extra 14th week to one of its fiscal quarters periodically. For Apple, the extra 14th week shows up in Q1 every so often. Apple’s Q1 2013 was one week shorter than the extra-long, 14-week Q1 in 2012 — a year in which Apple added back its extra week. Wall Street analysts failed to take notice and account for the fact that apple switched back to a normal 13-week quarter in Q1 2013. As a result, Wall Street’s expectations for Apple’s earnings were missed by a country mile and Apple’s stock experienced its worst one-day loss in four years, with a share price plunge of 10%.</p> <p>In 2018, due to calendrical confusion, Apple suffered again. In Q1 of fiscal year 2018, Apple sold fewer iPhones and Macs than in Q1 2017, a quarter with an extra 14th week. The number of Macs sold declined by 5% from Q1 2017 to Q1 2018, and the number of iPhones sold fell 1.2%. Apple reported its Q1 2018 results, missing the consensus estimates for unit sales. As a result, Apple’s share price declined by more than 4% in just one day. But, on a per week basis, Apple’s iPhone unit sales had actually increased by 6.4%, and Mac unit sales had increased by 2.4% from Q1 2017 to Q1 2018. Indeed, Apple’s Q1 2018 performance was superb. But, the analysts failed to catch the calendrical quirk, and Apple’s share price suffered. The HHPC will sweep all these day-count problems into the dustbin.</p> <p>The Hanke-Henry Permanent Calendar accounts for the disparity between its yearly length of 364 days and the length of the astronomical calendar (roughly 365.24 days, the duration of one full orbit of the Earth around the Sun) by tacking one additional full week to the end of every fifth or sixth year (specifically, 2015, 2020, 2026, 2032, 2037, 2043, 2048, and so on). Contrary to the current ad hoc convention adopted by companies, the HHPC extra week occurs at the same point: after the last week of December, every five or six years. So, with the HHPC, everyone will know exactly when to expect an extra week, and the problems that were visited on Apple and its share price will be eliminated.</p> <p>As it turns out, some of the financial problems generated by the Gregorian calendar are well known. In an attempt to correct them, the National Retail Federation (NRF) recommends their own calendar guide — the 4-5-4 calendar. The 4-5-4 calendar is a voluntary guide for retailers. It takes into account the need for comparability of retail sales between years. The NRF calendar divides each year into 52, seven-day weeks. These weeks are allocated into four, 13-week quarters. Each quarter is divided into three months. The three months consist of 4 weeks, 5 weeks, and 4 weeks. Each quarter contains 91 days, so each year has 364 days. The NRF’s calendar greatly improves sales comparability across quarters and years. Fine. But, the HHPC already addresses all of the problems that the NRF 4-5-4 calendar attempts to solve, and more. And, it does so with more accuracy, standardization, and scientific rigor than does the NRF calendar.</p> <p>The adoption of the Hanke-Henry Permanent Calendar will solve many of the problems thrown up by the quirks associated with the Gregorian calendar. Confusion and financial errors associated with a myriad of day-count problems will be swept into the dustbin. It’s time for a simple, astronomically sound, permanent calendar that is exactly the same year after year—forever. The HHPC is just what the doctor ordered.</p> </div> Thu, 22 Aug 2019 10:54:00 -0400 Steve H. Hanke https://www.cato.org/publications/commentary/financial-miscalculations-permanent-solution Steve H. Hanke discusses Trump's proposed tax cuts on CNBC Asia's Squawk Box https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-trumps-proposed-tax-cuts-cnbc-asias-squawk Wed, 21 Aug 2019 10:57:00 -0400 Steve H. Hanke https://www.cato.org/multimedia/media-highlights-tv/steve-h-hanke-discusses-trumps-proposed-tax-cuts-cnbc-asias-squawk