A random day in my global life – a celebration of free trade

I am writing this on an American designed computer – probably assembled somewhere in China.

Today I have spoken with an Indian and two Americans on the Phone (which is Japanese) – located in Denmark, Poland and Latvia.

I drove with Uber – a brilliant American idea – the driver was of Pakistani origin. He told me (speaking fluent Danish) that he and his wife speak Danish at home with their four kids but when they argue they argue in Spanish (his wife is Spanish-Pakistani) and Urdu.

Now I am home with my Danish wife – who grew up in Africa and who speaks fluent Lao – and my daughter. Our son is in Sweden at the Christensen vacation home with my parents.

Soon we will put on a movie on Netflix – another great American idea – or I might check out MyHeritage for the latest lead on my Southern Swedish origin (I got a nice mail from a helpful Swedish guy on that earlier today).

I am funding this by selling my services to corporations and financial institutions around the world.

If you want to close the borders for the free movement of labour, goods and capital then you want me to have a much worse life.

Long live free trade!

And now try to reconstruct YOUR DAY from a globalist perspective… and please share.

PS Did I mention I had Mexican food and French wine for lunch?

PPS 5 or 6 people from all over the world today asked me to link up on Linkedin today. I am extremely happy to get to know them all – whether they live in India or Israel.

Talking about the Polish economy on an airport escalator

Yes I readily admit it – I am begining to like to talk to my phone but obviously this might just be plain silly – talking about the Polish economy while on an escalator in Copenhagen airport.

See here

Me, myself and my phone #2 – PBoC’s challenge: Monetary policy in a world of slower trend growth

Oops I just did it again – I have been talking to my phone. This time about Chinese monetary policy – yesterday’s rate cut and what the implications of slower Chinese potential growth will be for Chinese monetary policy.

Watch my comment here.

In my comment I talk about two earlier blog posts. Have a look at them here:

Me, myself and my phone #1 (Chuck Norris, Saudis and beer)

China might NEVER become the biggest economy in the world

PS the handling of my phone is still horrible and the picture is probably shaken, but it is not a beauty contest, but rather a way of relatively fast share some views. I will of course work on the technics of this going forward, but I am not producing a tv show. All input is greatly appreciated.

Another look at the Chinese M1 gap – still a bit more room for easing

This morning the People’s Bank of China (PBoC) cut its key policy rate by 25bp to 5.1% – undoubtedly reacting to worries about slowing growth. The question is whether such a cut is warranted or not?

I have long argued that over the long run 15% M1 growth has been consistent with nominal stability in China. Hence, from around 2000 to 2008 Chinese M1 stayed on a pretty narrow path around 15% yearly growth. In the PBoC reacted to the global shock and the expected negative shock to Chinese money-velocity by expanding money supply growth significantly pushing M1 way above the 15% trend – probably overdoing it quite a bit (and luckily so for the global economy)

However, since mid-2010 actual M1 has started to re-approach the old 15% trend and in 2014 actual M1 dropped below the 15% trend – indicating a tightening of monetary conditions. The graph below illustrates that.

China M1 gap May 2015

 

Obviously one could easily argue that 15% M1 growth might be too excessive today as Chinese real GDP trend growth has slowed in recent years and will slow further in the coming years.

I would certainly agree with such argument. Therefore, I have tried to look at an alternative M1 trend where I assume the M1 growth should slow in line with a slowdown in potential real GDP growth from 10% (around 2010) to 6% in 2020. This basically means that I assume a gradual slowdown in “trend” M1 growth from 15% in 2010 to 11% in 2020.

The graph above also shows that (the green line). This trend (“Slowing trend growth”) is also still above the actual M1 level, but not by much. So in that sense today’s rate cut can be justified, but on the other hand based on such simple measures of the ‘money gap’ it is hard to argue for major monetary easing.

So what did I miss? Well, money-velocity. The calculations above assumes a stable trend in M1-velocity over time. That is probably wrong to do – particularly because the Chinese authorities are planing further financial sector liberalisation. But I will have to write about that at another time – now it is time to take the kids to the playground…

Pursuing a dream

I guess the news is out – I earlier this week resigned from Danske Bank to start my own business. This is what I a couple of days ago wrote about it on Facebook:

After more than 14 years with Danske Bank I have decided to resign from the bank to start my own business.

I plan to build my business around public speaking (I have made a deal with an international speaker agency), commentary and obviously advisory within the area of international economics, financial markets, Emerging Markets and obviously monetary policy.

The decision has been very long under way. I have had a wonderful time at the bank and the bank will always be “my bank”. Everybody who knows me knows to what extent I identify with the Danske Bank brand, but now it is also time to move on.

Today has been a very hectic and emotional day for me and I am very grateful for the very positive response I have got from colleagues and clients of the bank alike to my decision.

I still have contractual obligations with Danske Bank and I will continue to honour these obligations professionally and with the loyalty towards the bank that I always felt and still fell for a couple of months more until I fully throw myself into my new venture.

Thanks to all of my great colleagues at the bank. It has been truly great and you all will always remain my friends. I particularly want to thank my colleagues in Danske Bank Markets and my colleagues in Danske Bank in Poland, Russia and the Baltic States.

Bloomberg has an article on my decision:

Lars Christensen, the head of emerging market research at Danske Bank A/S, is quitting to start his own business as a consultant and public speaker.

Christensen, who spent 14 years at the biggest Danish lender, correctly predicted the downfall of Iceland’s economy two years before the island nation’s three largest banks collapsed in the 2008 global credit crunch, for which he was cited in Michael Lewis’s book “Boomerang.”

Four years ago he started The Market Monetarist, a blog about changes in economic theory in the wake of the “Great Recession,” especially on the role of central banks as they unleashed unprecedented stimulus to rejuvenate stalled growth.

“Since I started my blog, I’ve increasingly felt that the requests from conference organizers concerned areas outside of what I’ve been doing at Danske,” Christensen said by phone from Copenhagen on Thursday. “I’m leaving Danske but not emerging markets.”

Polish tabloid Fakt called Christensen a “Danish vampire,” accusing him of “speculating” against the country’s economy in 2009, when he forecast, also correctly, the zloty’s weakening to a record low. In his latest report from April 21, he predicted the Polish currency to appreciate to 3.95 per euro within three months, compared with 4.025 on Thursday, as the European Central Bank’s bond-buying program pumps cash into higher-yielding assets in eastern Europe.

Peter Kjaergaard Nielsen, a spokesman at Danske, confirmed by phone that Christensen was leaving the bank.

“When you work for a think-tank, you say how the world ought to look and when you’re in markets, you say how it will be,” Christensen said. “I’ve always been somewhere in between.”

—–

Contact:

Lars Christensen

lacsen@gmail.com

+45 52 50 25 06

Speaker agency: Spealist Speakers (mail: daniel@spealistspeakers.com)

An intra-European hot-pot effect

This morning I feel like qouting myself:

Over the past month, CEE and other non-euro European currencies have indeed been strengthening. This is ‘forcing’ central banks from the Swedish Riksbank to the Polish central bank to cut interest rates. So, we are getting a double effect of European monetary policy. The ECB is easing monetary policy, which on its own is stimulating Central and Eastern European growth through an export channel and at the same time the CEE central banks is moving towards further monetary easing, which is directly stimulating CEE domestic demand. This is good news for the CEE fixed income and equity markets particularly and for the CEE economies in general. As a result, we are becoming more upbeat on the outlook for growth in Poland, Hungary and the Czech Republic.

This is essentially what we call an intra-Europe hot-potato effect. The ECB is creating liquidity, some of which is spreading across Europe, like a hot potato being passed along. It is basically all part of a European portfolio rebalancing, combined with a monetary reaction in countries such as Poland.

We think this hot-potato effect will force CEE central banks to cut interest rates further to curb the appreciation of their currencies. This is likely to push the key policy rates of countries such as Poland, Hungary and Romania closer to the zero lower bound and, ultimately, this could force the central banks to use other policy instruments than the interest rate such as quantitative easing or currency intervention. The Czech Republic is already at the zero lower bound and the Czech central bank (CNB) has put a floor under EUR/CZK at 27. It has recently inched close to this floor and it is becoming increasingly likely that the CNB will be forced to intervene in the FX market to defend it. This is likely to cause increased focus on the underlying appreciation pressure on all of the CEE currencies.

And yes, this is an intra-European currency war and I believe it is good news for European growth. In a deflationary, slow growth scenario you should celebrate when central banks competie to ease monetary policy.

The Open Borders Manifesto

Today is Open Borders day. As I wholeheartedly believe in the free global movement of goods, capital and labour I encourage my readers to have a look at the Open Borders Manifesto.

This is from the Manifesto:

Freedom of movement is a basic liberty that governments should respect and protect unless justified by extenuating circumstances. This extends to movement across international boundaries.
International law and many domestic laws already recognise the right of any individual to leave his or her country…

We believe international and domestic law should similarly extend such protections to individuals seeking to enter another country…The border enforcement status quo is both morally unconscionable and economically destructive. Border controls predominantly restrict the movement of people who bear no ill intentions. Most of the people legally barred from moving across international borders today are fleeing persecution or poverty, desire a better job or home, or simply want to see the city lights.

The border status quo bars ordinary people from pursuing the life and opportunity they desire, not because they lack merit or because they pose a danger to others. Billions of people are legally barred from realising their full potential and ambitions purely on the basis of an accident of birth: where they were born. This is both a drain on the economic and innovative potential of human societies across the world, and indefensible in any order that recognises the moral worth and dignity of every human being.

We seek legal and policy reforms that will reduce and eventually remove these bars to movement for billions of ordinary people around the world…

How to choose a ”good” monetary regime

My recent trip to Iceland and my discussions there about the possible future changes to Iceland’s monetary regime have inspired me a great deal in terms of organising some of my views on monetary matters in general.

Market Monetarists are known for our advocacy of nominal GDP level targeting, but it is also well-known that we have argued this primarily for countries like the US or UK rather than as a “one-size-fits” all regime. In fact Scott Sumner again and again has stressed that he does not think NGDP targeting necessarily is fitting for small-open economies like Denmark or Hong Kong.

Similarly I have myself suggested other rules for small-open economies such as my suggestion that commodity exporting countries like Russia should peg the export exchange to the price of its main export. This of course is what I have termed an Export Price Norm (EPN).

Similarly while Milton Friedman generally favoured floating exchange rates he also noted that different variations of pegged exchange rate regimes might be preferable for certain countries. Friedman often highlighted the apparent success of Hong Kong’s currency board system as a good monetary regime.

One can of course see this as pragmatism or realism and I am sure Scott would have no problem with that. However, I would rather stress the crucial different between what we want to achieve with our choice of monetary regime and how we are trying to achieve it.

Towards a “good” monetary regime
In my presentations in Iceland I stressed that I don’t think there is such a thing as an “optimal” monetary policy regime. What is the best regime might change over time and between different countries depending on numerous factors.

Hence, the choice of monetary regime to some extent will have to be a purely empirical matter. We fore example can’t say a priori that floating exchange rates are preferable to pegged exchange rate regimes under all circumstances even though some of us tend to think that variations of floating exchange rates in general are preferable to fixed exchange rate regime.

However, I believe that we a priori can establish certain criterion for what outcome we would like see a certain monetary regime produce.

Overall, I believe that the overriding goal of the monetary regime must be to ensure the highest possible level of nominal stability.

I see nominal stability as a situation where the monetary regime does not generally distort the allocation of goods, labour and capital both across sectors and across different time periods. Hence, my ideal monetary regime is one that we can think of as “neutral” in the sense it does not impact relative prices in the economy.

This basically means that the monetary regime should ensure an outcome similar to a batter economy with no transaction costs – an outcome where Say’s Law rules or an outcome where we cannot make any Pareto improvements by adjusting or changing the monetary regime.

Furthermore, I would argue that a good monetary regime is transparent, predictable and well understood by the general public. Hence, rules are preferable to discretion as a general principle.

And finally the monetary regime should be robust. That implies that the risk of a “highjacking” or a politicization of the monetary system should be as small as possible. Hence, a certain regime might produce a good outcome today, but if the same regime tomorrow is likely to be taken over by certain political interests then we cannot say that the regime is “good”.

Furthermore, a robust monetary regime will ensure a “good” outcome under different shocks to the economy, changes in the political climate or even changes to political institutions. Therefore a regime cannot be said to be robust if it only “performance” well under demand shocks, but not under demand shocks or is overly sensitive to political uncertainty and crisis.

Finally, I would argue that a robust monetary regime is as little dependent on human judgement and data as possible. Hence, we can imagine a perfect monetary regime, which ensures an extremely high degree of nominal stability, but it can only be implemented by Alan Greenspan. Such a regime certainly would not be robust.

Concluding, a good monetary regime ensures a high degree of nominal stability, is transparent, predictable and is robust economically, political and institutionally.

It isn’t hard to see that no monetary regime will always be good across countries and time. Hence, I think that NGDP targeting regime as advocated by Market Monetarists would approximately be a “good” monetary regime for the US, but it would likely not work as well as alternatives in low-income countries with weak economic and political institutions.

Monetary regime trade-offs

The choice of monetary regime therefore ultimately is about trade-offs between how well different regimes “score” on the overall criterion for a “good” monetary regime.

Overall I have no doubt that two regimes – in the textbook form – can described as being “good” regimes and that is Free Banking and NGDP level targeting. Similarly I would argue that in the strict theoretical form inflation targeting and a fixed exchange rate regime cannot a priori be considered as being good monetary regimes as both regimes will distort relative prices and hence not ensure nominal stability.

However, these are textbook examples. In the real-world (an expression I hate…) we are facing the choice between imperfect systems. For example it is clear that a George Selgin style textbook Free Banking system would ensure nominal stability. However, we can also historical conclude that Free Banking systems have tended not to survive for long. Not because they didn’t ensure nominal stability – they to a large extent did – but they just didn’t turn out to be robust enough.

On the other hand some monetary regimes have been very robust even though they have been less optimal from a nominal stability perspective. The Danish pegged exchange regime, which essentially has been in place since 1982 has been very robust. It has survived numerous domestic and external shocks, financial crisis and political uncertainty. However, it is not hard to argue that at least in theory a NGDP targeting regime with a floating krone would give more nominal stability than the pegged exchange rate regime. But the crucial question is that if the improvement in terms of nominal stability is relative small would it then be worthwhile experimenting with more than 30 years of robust and high-predictable rule based monetary policy regime?

Finally and this is what got me to think more deeply about these issues is the experience with monetary policy in Iceland since the country became independent in 1944. Hence, Iceland has only have short periods of nominal stability, while we again and again have seen episodes of high inflation, banking crisis and general monetary and exchange rate instability.

Thinking about Iceland’s historical monetary dysfunctionality is increasingly leading me to think that there simply is a near-natural impossibility of ever ensuring nominal stability in Iceland as long as country maintains monetary sovereignty and the best way to solve this problem of lack of robustness in the monetary system would simply be to “outsource” the monetary regime – either by introducing a currency or even better through dollarization (for example by introducing the Canadian dollar or the Norwegian krone).

However, getting rid of monetary sovereignty in Iceland comes with a trade-off. Hence, by giving up the króna would likelu get less nominal stability on for example a textbook NGDP targeting regime.

However, by comparing a less than perfect dollarization regime for Iceland with a textbook NGDP targeting regime would be what Harold Demsetz termed a Nirvana Fallacy. Hence, Demsetz would have told us to choose between different economic institutions (here monetary regimes) based on real institutions arrangements rather than comparing an “ideal norm” and an “imperfect” regime.

Such a comparative-institutionalist approach would make us choose among imperfect alternatives – for example in the case of Iceland the present not very robust sovereign monetary regime and for example a regime with dollarization of some form.

Monetary revolution, monetary evolution and windows-of-opportunity

Such an approach also tends to make us more humble when we discuss different alternatives to real exiting monetary regimes. That does certainly not mean that the status quo is preferable. Far from it, however, it does mean that some times we should simply accept exiting monetary institutions and arrangements as the best we can get – at least until we get a window-of-opportunity to change things. Such window-of-opportunity could be economic, financial or political crisis or a change in political sentiment. In the case of Iceland I think that we might be approaching such a window-of-opportunity in the next couple of years.

So even though I feel somewhat uncomfortable with being this pragmatic and feel I sound like Hayek I will have to say that monetary evolution often will make more sense than monetary revolution.

However, that does not mean that we should not advocate change. We certainly should, but maybe it makes most sense to focus on ideas of monetary reform rather than throwing ourselves into discussions about minor changes in actually “calibration” of monetary policy in a given monetary set-up. Frankly speaking who cares whether the Federal Reserve should hike interest rates in May or in August? Isn’t the important question how we can change the monetary setting to ensure nominal stability for the longer run?

I remain a proud advocate of NGDP targeting, but I would like to think of NGDP targeting as a “ideal regime” that might or might not be possible to implement in different countries. We can hence, use NGDP targeting (and Free Banking) as a benchmark for both how present monetary policy is calibrated and as benchmark to compare different real-lift monetary institutions.

Differences in central banker pay illustrates why the euro is not an “optimal currency area”

Bloomberg has a great story on differences in the pay of different central bank governors within the euro area.

This graph is from the Bloomberg story:

cb pay

As the graph illustrates there is a massive difference between how much the different euro zone central bank governors are paid. These differences probably very well reflect the general differences in income levels within the euro area.

Normally we would say that a core condition for being a “Optimal Currency Area” is that the income (productivity) level of different countries/regions within the currency area should be on a fairly similar level. The pay differences of euro zone central bankers illustrates quite well that this core condition is not fulfilled within the euro area.

PS  This is from the Bloomberg story: “The economic turmoil has also crimped earnings at the Greek central bank. Governor Yannis Stournaras gets 7,342 euros a month after taxes following two rounds of voluntary cuts by his predecessor, by 20 percent and 30 percent.”

Merry Christmas

Dear friends and readers,

Christmas is family time – also in the Christensen family so this will be a short post.

I just want to thank all my loyal readers and followers for following and commenting on my blog (and following me on Twitter and Facebook).

It gives me lots of joy writing my blog and it is getting me in contact with interesting people from all over the world. I am grateful for that. For those of you who are celebrating Christmas these days I wish you a Merry Christmas.

See you all soon!

PS I have the same wish-list as George Selgin (just replace George’s “Bitdollar” protocol with a NGDP futures market and add a wish number 11 that I want the ECB to do this)

Christmas_tree

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