Tag Archives: political economy

Currency Swaps and the Federal Reserve’s Role

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The currency swaps, the foreign exchange swaps, discussed here are a lifeline our Federal Reserve Bank system extended to other nations during the Panic of 2008.  The arrangements let foreign central banks exchange their domestic currencies for US dollars in order to increase their domestic liquidity in addition to merely printing more domestic currency units.

The Wall Street Journal thinks the Fed should extend such swaps to more national entities than the few with which we still have such arrangements, under the guise of “that’s what the Fed’s role is.”

I have a couple thoughts on this.

…some folks to forget that financial panics happen, and that’s one reason the Federal Reserve exists.

No, it isn’t. The Fed exists to maintain price stability and full employment. Full stop.

Pricing instabilities might lead into financial panics, and vice versa, but if the Fed sticks to its role—working to maintain/restore price stability rather than reacting to panic itself—the panic will subside in result.

It [the Fed] could extend these swap lines to other countries with markets in tumult like Australia, South Korea, China, Taiwan, and Hong Kong.

It might—even likely would—be beneficial to extend swap lines to the Republic of China, along with most of the others named. It will do us little good at all to help out an enemy, the People’s Republic of China, for all that we’re presently (too much) entangled with the PRC’s economy. On the contrary, the drag the PRC’s economy represents on our own and those of other nations around the world illustrates clearly the utility of reducing that entanglement and increasing the flexibility of business’ supply chains.

A Speculation on Oil

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I have one of my own, against the backdrop of the oil production and price war just begun between Saudi Arabia and Russia.

The Saudis, dismayed over Russia’s refusal to go along with a proposal to further reduce oil production in the face of declining economic demand that’s potentiated by the coronavirus affair, have announced an increase in oil production.  Russia has responded with a “we can do that, too” threat.

The increase by the one (to begin 1 April) and the threat to match by the other have sent oil prices into the low $30s per barrel with projections into the mid-$20s.  Both nations claim they can afford these prices for the next few years before they exhaust their financial reserves.

Those reserves would be tapped heavily because the Saudis need $80 per barrel to balance its budget, although its debt-to-GDP ratio is in the neighborhood of 25%, so they can borrow for some time on reasonable terms.  Russia needs $50 per barrel to balance its budget, and its debt-to-GDP ratio is in the neighborhood of 15%.

On the other hand, Russia’s currency has fallen about 10% since the oil crisis began, while the Saudi riyal is pegged to the dollar.  Those combine to reduce the strain on Saudi Arabia’s overall economic moves relative to Russia’s.  Russia also faces reduced economic flexibility relative to the Saudis due to the broad reach of sanctions applied to it over its military and cyber adventurism.

The snapshot and short-term future would seem to favor Russia in this pricing and production contest, but the longer term not so much as currency fluctuations and sanctions will continue to accumulate in their relative effects.

If this contest gets to the longer-term, one other factor could come into play that would support Russia against Saudi Arabia: the People’s Republic of China greatly increasing its purchases of Russian oil.  This would favor the PRC, too, as it would give it a nearby source of cheap oil along with a distribution network that would be less vulnerable to international disruption.

It would also deepen Russia’s dependence on the PRC—possibly good for the PRC, but definitely dangerous for Russia.

Note, though, that I’m ignoring the impact of this contest on our own oil (and gas) industry; the contest will not do us any good at all.

A British Proposal

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In contrast with UK-EU negotiations, begun earlier this week, these are the high points of Great Britain’s suggestion of what a US-UK trade deal would look like.

  • reduce or remove tariffs for UK exports…US has indicated its intention to seek to reduce or remove UK tariffs on US exports in a UK-US FTA
  • customs procedures at the border are as facilitative as possible makes importing and exporting easier
  • address subsidies which have the potential to distort trade. Provisions for fair, effective and transparent competition rules could underpin liberalisation of trade between the UK and the US
  • a UK-US FTA as an opportunity to build on our global leadership in this area to develop a world-class [Intellectual Property] chapter

These form the core of an actual free trade agreement, one that is much better than the restrictive, anti-competition, anti-business straitjacket in which the EU wants to trap Great Britain and in which it wants to keep remaining member nations trapped.

The proposal itself can be seen in its entirety here.

Question for the Future

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My wife put it to me re the Progressive-Democratic Party: Stipulate arguendo that Trump is reelected (regardless of the [Progressive-Democrats’] nominee). Who’s their bench for 4 years from now? Amy? Pete? ?????

It’s true enough, there is no next generation in Party; they’re going to have to skip one to get to anyone even remotely viable.  Who do they have?

Senator Amy Klobuchar (D, MN) is all they have in their next generation, but she’s a one-hoss shay that’s starting to fall apart.

Pete Buttigieg would seem to be the front-runner in that skipped-to generation, but he’s just not capable. Too many demographics don’t trust him: black voters because he’s been worthless, even counterproductive, in his own small city; veterans because he’s bragged too much about his soft tour in Afghanistan (as such tours go), spending his free time on roof tops smoking and getting into his laptop instead of looking for ways to further his unit’s mission; moderates of any stripe because his economic and social safety net ideas are destructive of the things that actually would support the least among us.

Robert Francis O’Rourke is in the mix—and Progressive-Democratic Party Presidential candidate Joe Biden has promised to make him the head of a Gun Confiscation program in a Biden administration. And he is born to it.

Alexandria Ocasio-Cortez (D, NY) will be old enough for 2024 and beyond elections, but she won’t be mature enough. Her social welfare, climate, and economic ideas are just plain crazy.

Ro Khanna (D, CA) will happily parrot the Party line, including the new Party-centric position of free stuff for everyone, and that’s certainly sufficient to qualify him for Party standard bearer. He virtue signals with the best of them, too, but none of that is enough for anything serious. And he doesn’t have the fire in the belly required to go past the safety of his California district.

I tend to favor an Ocasio-Cortez-O’Rourke ticket, though: their ideas need to be dragged out into the open and clearly, sharply debated as the only way to put those foolishnesses to rest.

Tight Schedule

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Negotiations are in progress on the nature of the, primarily economic, relationship between Great Britain and the European Union now that the former has taken its leave of and independence from the former. The relationship being negotiated is primarily economic; although, law enforcement, judicial cooperation, foreign policy, security, and defense are under discussion, also.  The functional deadline for these negotiations is 31 December 2020, after which the Brits have said they’re done, deal or no deal.

Ten rounds of meetings are scheduled every three weeks from Monday, March 2, until October when a deal is desired.

Following which enacting legislation would need to be passed by both sides in order to bring the deal to life. “Most experts” think this is a tight schedule.

It need not be, though: the putative tightness of this schedule is directly and strictly a function of the degree of intransigence that will be exhibited by the EU’s negotiators.  I hold out no great expectations here; the EU has been operating in bad faith, using its position to discourage other dissatisfied nations from going out from the Union, ever since the Brits voted for sovereignty.

In this current round of negotiations, too, the Brits appear more serious than the EU.

UK Prime Minister Boris Johnson threatened to accelerate [the schedule] further last week, saying the UK would end talks as early as June if negotiations had failed to progress by then.

It needn’t be a tight schedule, nor need it be “tightened” further. Again, that’s up to the continental Europeans.

Sadly, the EU’s intransigence is demonstrated in a couple of areas:

  • EU wants the UK to enact EU regulations and laws regarding business subsidies, labor law, the environment
  • EU wants its Common Fisheries Policy to apply in British territorial waters, especially British coastal waters

Nor is the matter of EU labor movement entirely settled; the EU still hopes for free access—essentially waiver of British national borders—for EU workers to British territory.

These run directly counter to Great Britain’s national sovereignty; of course, the continental Europeans know this full well. It’s why they demand these accessions.