Geo-Graphics

Russia’s foreign exchange reserves have fallen by nearly 1/3 since October 2013; they’ve fallen 20% just since September 2014.  Whereas the country still has over $300 billion in reserves, about $150 billion of this may be illiquid; it also has close to $700 billion in external debt. Whom would Russia turn to for dollars in a crisis? The IMF is the most obvious place.  The IMF approved lending to Russia of about $35 billion (SDR 24.8 billion) in the 1990s. With the sort of “exceptional” access that the Fund has granted to Greece, Portugal, Ireland, and Ukraine, Russia could potentially borrow up to $200 billion today, as shown in the figure above.  But when it comes to Russia, the United States and Europe are not in a generous mood at the moment.  Moscow would almost surely want to look elsewhere. What about its new BRICS friends?  Putin had said in 2014 that the new BRICS Contingent Reserve Arrangement (CRA) “creates the foundation for an effective protection of our national economies from a crisis in financial markets." Russia could potentially borrow up to $18 billion through the CRA.  But here’s the rub: it can only do so by being on an IMF program.  Without one, Russia could borrow a mere $5.4 billion – chicken-feed in a crisis.  In fact, borrowing such a pitiful sum might only precipitate a crisis by hinting that one was coming. What about China?  Here, things get interesting.  Under a central-bank swap line agreed in October, Russia could borrow up to RMB 150 billion – the equivalent of $24 billion at current exchange rates. China’s Commerce Minister Gao Hucheng has reportedly said the swap line could be expanded. What would Russia do with RMB, though?  Why, sell them for dollars, of course – as Argentina is apparently prepared to do with the funds received through its swap line from China. China might be happy for Russia to sell the renminbi it receives for dollars, as doing so would put downward pressure on the RMB without implicating Beijing in “currency manipulation.” “Russia plays an indispensable role as a strategic partner of China in the international community,” according to a December 22 editorial in China’s Global Times. “China must hold a positive attitude to help Russia out of this crisis.” In short, China may well have both economic and geopolitical reasons for offering Russia a helping hand.   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

In its last two statements, the FOMC has said that it “expects inflation to rise gradually toward 2 percent over the medium term”—2 percent being its target rate. What would it take to move it there? We looked at how many different variables correlate with the Fed’s preferred inflation measure—core PCE inflation. Oil and the dollar have been much in the news of late, but their prices have had little relationship with core PCE inflation over the past decade, as shown in the bottom-left figures above. The single variable that seems to correlate best, as seen in the top-left figure, is the employment/population ratio among adults aged 25-54 years. If we follow this ratio’s trend-line since 2013, when it began its last major upturn, this suggests that core PCE inflation won’t hit 2% until late 2016 or early 2017—as seen in the large right-hand figure. If we follow it since its trough in 2011, core PCE inflation does not hit 2% until late 2017. This suggests that a “patient” Fed might not begin hiking rates until considerably later than the market is currently anticipating, which is the middle of this year. A 2016 rise seems more plausible. The Economist: Opportunistic Overheating Wall Street Journal: Fed Flags Midyear Rate Hike-Or Later Financial Times: Dollar Rally Stalls on Rate Rise Rethink Federal Reserve: FOMC January 28, 2015 Statement   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

In two recent blog posts (1/6 and 1/7), Paul Krugman highlighted a chart he made that, he says, illustrates clearly the failure of “austerity” around the world.  We reproduce it above on the left. Krugman’s chart plots changes in real GDP against changes in real government purchases for 33 advanced countries between 2010 and 2013.  The slope of the trend line (which Krugman does not draw) is clearly positive (with R-squared of 0.31), suggesting strongly that cutting government spending (during that period) reduced growth, and that raising it increased growth. The problem with this figure is that it mixes countries that were able to use monetary policy with those that weren’t – such as those in the Eurozone or those with hard currency pegs.  Referring to this problem, Scott Sumner recently asked on his blog: “Why do Keynesians show cross-sectional graphs of fiscal austerity and growth, mixing in countries that have their own independent monetary policy with those that do not?” Sumner’s point is that countries that have independent monetary policy can, in principle, offset fiscal drag with more accommodative monetary policy.  Is he right? On the right-hand figure above, we re-did Krugman’s chart for advanced countries with independent monetary policies.  Lo and behold, Krugman’s spending-growth relationship collapses, as Sumner would have expected. This is not to say that austerity is good.  But it does undermine the empirical basis for Krugman’s claim that reducing government spending lowers growth, and that increasing government spending raises growth, at least in countries that can use monetary policy as well as fiscal policy.   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”