Cyrillic Partners

Got this today from my elementary school librarian:

There’s a neat article in the April 14 Fortune by Elizabeth Spires that lays out a case for the government consistently under-estimating inflation by focusing on “core” inflation instead of increases in the overall Consumer Price Index (CPI) as a means of screwing Social security recipients.

It’s a fun column, that tackles the complexities of inflation measurement with aplomb and wit, while explaining the great importance of knowing exactly how much more we pay for various goods and services. Spires compares the use of the core inflation rate–which she says ignores increases in food and energy prices–to the government saying that aside from the casualties, fighting and troops deployed in Iraq, there really is no war.

We wrote about government inflation reports some months ago. 

The government of Venezuela cut the official exchange rate of its currency, the bolivar, in order to stem inflation.

Rather than address the root causes of inflation, such as the printing of cash to fund arms deals, the government has just hacked three zeros off the currency exchange rate.

The bolivar’s official exchange rate is now 2.15 bolivars per dollar, compared with the previous official rate of 2,150 per dollar.

Prices are expected to adjust accordingly.

The bolivar inflated at more than 20% for the last twelve months ending in November. Inflation sat at 17% in 2006, according to Reuters.

Makes me wonder if they have any economists in Venezuela.

[Image from the BBC]

“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]

Denmark will consider dropping its currency, the Krone, in favor of the Euro on the country’s upcoming referendum. The AP has the story.

The Krone is already tied to the Euro and the Danish central bank shadows the interest rate moves of the European Central Bank.

Membership of the euro is clearly still controversial. It was rejected in 2000 by 53 to 47 per cent, after an emotional campaign that saw a grassroots No movement outpoll all the main political parties, backed by the Danish employers, the trade unions and most of the media.

Economists argue that Denmark gains nothing by being outside the single currency, for the krone is tied to the euro, and the Danish central bank shadows the interest moves of the European Central Bank – often within 15 minutes of a change.

[Image From Wikipedia]

Finally there’s a new software service that simplifies the stupefying world of foreign exchange trading. TechCrunch has the story on eToro and a comprehensive review.

The takeaway? It looks and feels like online gambling, despite the company’s best efforts to eschew such comparisons. From Roi Carthy’s story:

The one thing I found odd about eToro is its rigid insistence on the lack of parallels when comparing it to online gaming operators. This is a rather naïve point-of-view for several reasons: First, one of the company’s co-founders and its CTO is David Ring who was a key R&D leader at Israeli-based 888.com (a major online casino and poker room operator). Second, eToro’s client application is strikingly similar to gambling apps, and this cannot be a pure coincidence. Third, eToro is a BVI company, (a.k.a., a British Virgin Islands company)—classic tax strategy by gambling operators. Fourth, the company’s affiliate marketing offering is extremely reminiscent of gaming operators, “Receive 25% of eToro’s Revenues or Get $2 per every free registered user.”

It’s hard to imagine serious traders jumping onto eToro to make their investments. It’s similarly hard to imagine the casually interested getting involved. Still, with the falling dollar driving interest in currency issues, the company may have a niche to fill.

[Image from TechCrunch]

The United Arab Emirates is considering ending its 30-year peg to the dollar, citing falling currency concerns that are driving inflation and an increasing price of imports for the country. Bloomberg covered the story earlier this month.

The move would not be unprecedented. Kuwait dropped its U.S. Dollar peg in May. OPEC is also considering dropping the dollar in favor of a basket of currencies, as we’ve written about earlier this month. The U.A.E.’s move is unlikely to upset the U.S. applecart just as the OPEC move is similarly unlikely to.

French President Nicolas Sarkozy went to China and complained about the Government’s strangle-hold on the Yuan and begged the government to let the currency appreciate against the Euro. Reuters has the story.

Keeping the yuan low makes it easier for Chinese businesses to export their goods. Other countries, especially the U.S., are complaining that China’s currency policy is giving its exporters an unfair advantage over domestic suppliers.

Henry Paulson, secretary of the U.S. Treasury, made similar statements earlier this month. He said China needs to loosen its choke-hold on its currency and let it adjust to market prices and appreciate faster. The secretary said China was “out of step,” with the rest of the world’s perception of what it needs to do with its currency. (Read our story about his statements here.)

Some pundits have opined that the U.S. is attempting to replicate China’s protectionist currency policy–devaluing the dollar to stimulate exports and domestic production. I wouldn’t bet on that actually happening however.

[Image from FoxNews.com]

A friend from across the pond, a writer for the Economist magazine, sends the following image.

Her take? “Nice to know dollars are still good for something, eh?”

[Image Source]