Cyrillic Partners

The Federal Reserve fell short on Wall Street’s expectations Tuesday, dropping rates a mere quarter point instead of the half-point businesspeople were clamoring for.

It highlights a problem of expectations. When the market expects the Fed to make a certain move and it makes that move, there’s a disappointment that it didn’t go further. It’s almost as if the more the market knows about the Fed is going to do, the less it actually responds to the stimulus.

So why then does the Fed pushing to publish even more information on its actions? We called it “a subtle way to take power away from the various would-be prognosticators by publishing even more information. It makes the black box of the economy look a little less opaque,” when we wrote about the Fed plan to increase the number of times it publishes its projections (read the story).

But there’s something else going on here too. Continue Reading »

“Agflation,” or the inflating price of agricultural commodities, is hitting the transitional economies of Eastern Europe and the Baltics like a punch in the chest.

It’s not something we think of too much in the western world. Food makes up only a small part of our consumption basket. But when the price of butter goes up 65% in three months in Bosnia and Herzegovina it can lead to serious unrest.

The central bankers of the countries most affected often see their hands tied. They’ve pegged to the Euro (a prerequisite for joining the EU) and can do little if anything to fight the inflation.

The Transitions Online site has an interesting story about the problem.

[Image from IAState.edu]

The Bank of England’s monetary policy committee voted to cut interest rates by 25 basis points on Thursday, to 5.5% from 5.75 percent.  It cited a decline in consumer spending, tighter credit and trouble in financial markets.

It’s the country’s first rate cut since 2005.

The European Central Bank kept its interest rates at 4%, ostensibly to fight inflation.

“The recent flurry of markedly softer data and survey evidence relating to the services sector, consumer confidence and the housing market has clearly raised fears within the monetary policy committee that there is an increased risk that growth could slow sharply over the coming months,” Howard Archer, chief UK and European economist with Global Insight–who correctly predicted the rate cut–told Forbes.com. Archer went on to tell Forbes.com that he expected the Bank of England to cut rates twice in the first half of 2008, taking them down to 5.0% by the middle of next year.

It’s a good example of why some European countries do not necessarily benefit from adopting the Euro and the dictates of the ECB. The organization tends to worry more about inflation and takes an economic strategy that favors the largest EU nations.

We recently wrote about Denmark and its renewed interest in dropping the Krone for the Euro.

An essay came across my desk today that I thought worth passing on.  Professor Andrew Clare argues that despite the dollar’s downturn, there are significant costs associated with moving off the currency. He also points out that the world’s previous currency for global commerce was the British Pound, which succumbed due to the loss of power its underlying economy went through when it disposed of its colonies. The U.S. has not undergone such a dramatic fundamental economic change (despite credit crunches and national debt).

The full essay is continued after the jump.

The Death of the Dollar
By Andrew Clare

Andrew Clare is a professor of finance at London’s Cass Business School and a former economist with the Bank of England.

With oil prices hovering just below the totemic $100 per barrel level you could be forgiven for thinking that the world’s major oil exporters would be happy. But the mood at a recent OPEC summit was more sour than sweet.

“They get our oil and give us a worthless piece of paper,” complained Iran’s Mahmoud Ahmadinejad.

The “worthless piece of paper” was essentially the “mighty” green back. Oil like most other commodities is priced in dollars so a fall in the price of Continue Reading »

U.S. Treasury Secretary Henry Paulson said the Yuan isn’t appreciating fast enough to reduce the protectionist effects of an artificially low currency.

“A more flexible currency is especially important now, when the risks of inflation are clearly rising in the Chinese economy,” Paulson said in a speech to the Asia Society in Washington and Bloomberg reported.

The Yuan has appreciated about 6% against the dollar in the past year. (Maybe the U.S. should just weaken the dollar some more so that China can catch up!).

China has been growing great guns, as Bloomberg points out: China’s economy, the world’s fourth largest, expanded 11.5 percent in the third quarter from a year earlier. The central bank has raised interest rates five times this year to curb rising stocks, property prices, an acceleration in fixed-asset investment, and the highest inflation in a decade.

Paulson has been complaining about China’s currency for more than a month now. Read our last story on it.

French President Nicolas Sarkozy has also been vocal on a loser Yuan. Read our story on it.

[Image from Bloomberg]

Tradable emissions permits markets were all the rage when I was in school. It seemed like the perfect opportunity to solve a social problem in a sane, economically-justified libertarian way. The professors painted a picture of economists saving the day by pointing the invisible hand of the marketplace toward an intractible social problem.

Well, fast forward a few years and the cracks in the system are starting to show. My friend Katie Fehrenbacher’s great site, Earth2Tech.com, has a great description of what’s going on:

The fragility of the nascent carbon offset economy is front and center this week. As the U.N. was kicking off its Framework Convention for Climate Change in Bali yesterday, on the other side of the world Irish certified emission reduction (CER) credit provider AgCert saw its stock tumble over 70 percent. The collapse occurred following the company’s announcement that it would not be able to deliver all of the 7.2 million tons of United Nations-approved carbon offsets if had committed for 2008.

This follows Friday’s report from the WWF that a full fifth of U.N. carbon credits issued through the Clean Development Mechanism (CDM) are bogus and actually increase emissions. None of this bodes well for the struggling carbon market. The cap-and-trade carbon solution is the favored mechanism for carbon emissions control, but the U.N.’s top climate change official Yvo de Boer warned last month at the Carbon Forum Asia that the carbon trading market “could disappear more quickly than it appeared.”

Reporter Craig Rubens does a good job of wrapping up the recent developments in cap-and-trade systems and says that much of the future of the current carbon trading program relies on what happens in Bali in the next two weeks.

We’ll be keeping an eye on it.

Corporate Average Fuel Economy (CAFE) standards set the minimum gas milage an automobile maker’s fleet can obtain and has been a matter of contention for years.

Congress is expected to vote on higher standards for miles per gallon Wednesday. SFGate has a good quick history of the legislation:

If the bill passes, it would shake up the fuel economy of the U.S fleet, which has been stagnant for two decades. After Congress passed the program in 1975, fuel economy of passenger cars doubled in 10 years, from 14 miles a gallon to 28 miles per gallon by 1986. But as oil prices dropped in the late 1980s, automakers began selling SUVs, trucks and sedans that were bigger and more powerful - features consumers enjoyed.

Critics complained that, without any push from Washington, auto companies have let fuel economy flatline. Current law requires 27.5 miles per gallon for cars - the same as a decade ago - and 22.2 miles per gallon for light trucks.

Generally speaking, the position of V and I is that government should stay out of the way of the “invisible hand” of the marketplace for solving social problems. One of the big problems with legislation of this type is the bizarre incentive structure it establishes. And every piece of legislation has its loop holes.

CAFE is the perfect example. The legislation was designed, in part, to give farmers a break. It recognized that there was a subset of the U.S. population that needed serious trucks for agricultural work and it didn’t want to screw those people over.

But times change (always faster than Congress legislates) and light trucks became increasingly popular for the general public as commuter vehicles. The SUV became a favorite tool for suburban “soccer moms.” And automakers classified SUVs as light trucks, which are held to a lower CAFE standard.

So as SUVs became more popular, the percentage of vehicles on the road that had to actually achieve the 27.5 mpg fleet average decreased. I don’t know the stats, but I’d wager that the mpg average of all vehicles on the road was actually much, much closer to the light truck standard than anyone in Washington ever imagined.

So much for the “standard.”

More on this legislation later.

There are a handful of news articles out today speculating that Saudi Arabia will break ranks with the rest of OPEC and increase the supply of oil (see CNN.com, for example).

The country can afford to throw its weight around because its reserves are so much larger than its closest competitor. Most of the other countries in OPEC are already pumping at full capacity. More oil on the market would hurt these other countries who would be unable to offset the falling crude price with more production.

Economists spend a lot of time thinking about cartels and the game theory behind how they work. Cartels are hard to enforce, especially when the one-time reward of cheating can outweigh the potential sanction any single member would face from the group. 

[Image thanks to EVWorld.com]

Less than a week after VW announced it would open a production plant outside of Moscow (see story), GM has decided to join the Russian automarket, offering a bid to buy a slice of AutoVaz.

AutoVaz’s parent company, state arms exporter Rosoboronexport, was looking to offload a piece of the car maker just as GM was looking to expand into new markets. The U.S. automaker has seen its margins decline as people move away from highly-profitable SUVs and toward less-profitable cars.

GM sees Russia as an opportunity for growth. The two companies had a joint venture to produce the Chevrolet Niva sport-utility vehicle and the Chevrolet Viva sedan.

[Reuters has the story]

I just found the Photo-Mania blog of black and white photography that recently won the Jury Award at the Deutsche Welle International Weblog Awards 2007, Blognation Russia reports. There are some truly inspirational and great photographs of Minsk, Belarus here. Worth taking a look. The blog is one of many hosted on the now-Russian-owned LiveJournal.

[Image from Photo-Mania]

Germany’s Volkswagen opened a production plant in Kaluga, about 125 miles southwest of Moscow, signaling increased foreign confidence in Russia as an investment destination.

Reuters delivers the stats: Foreign direct investment surged 91.3 percent in the first nine months of this year to $19.6 billion and capital investment are up by 19.6 percent year-on-year in October, far above overall economic growth of 7.5 percent.

The auto market in Russia is expected to be Europe’s biggest by 2011, according to analysis by PriceWaterhouseCoopers.

“We are convinced that the Russian car market has huge potential and you can be sure that Volkswagen will make it a priority target,” VW Chief Executive Martin Winterkorn told Reuters. He expects 45 million Russian households to own a car by 2010.

Oskar Akhmedov, director of VW Group Russia, foresees dramatic growth in the Russian automobile market in coming years, according to a story in BusinessWeek: “The population is under-motorized,” he says. While Germany has 500 cars for every 1,000 people, Russia has only 190. Even in other former communist countries in Central Europe, the number is between 300 and 350. In Russia today there are 2.25 million vehicles sold annually. By 2015 that number will be 3 million. “Conservatively speaking,” Akhmedov adds.

[Image from TheLightIsGreen.com]

Six Apart, owners of popular advertising-supported blog site LiveJournal, sold the service to Russian Internet media company SUP for an undisclosed amount. BlogNation Russia puts the deal value at $30 million.

The service counts 14.3 million blog accounts and roughly 20 million visitors a month. Its writers publish more than 150,000 new posts a day. [Data from Reuters]

“The deal will allow LiveJournal to get the attention, and frankly, the investment, to allow it to flourish,” Andrew Paulson, SUP’s chief executive, said in a phone interview with Reuters.

CEO Chris Alden stated “This allows Six Apart to focus on their remaining three brands, Vox, TypePad, and Moveable Type. We have very ambitious plans for our remaining brand going forward.”

Eric Eldon points out the deal’s political implications at VentureBeat.