Archive for January 23rd, 2019

Does inflation targeting make the poor poorer?

January 23, 2019

Recently Prof Abhijit Banerjee said that RBI’s inflation targeting has made the agrarian crisis worse.

Nice bit…


Uproar over paintings at Iceland Central Bank

January 23, 2019

Reported in Iceland Review:


Strengthening the capacities of the system for fight against counterfeiting of the euro

January 23, 2019

Interesting speech by Ms Emilija Nacevska, Vice Governor of the National Bank of the Republic of Macedonia.

She talks about Twinning Project which is a European Union instrument for institutional cooperation between Public Administrations of EU Member States and of beneficiary or partner countries. The beneficiary countries could be those who want to be part of the Union and those who do not want to be part of the Union. One of the expertise is to build capacities to fight counterfeit of Euro:

It is my honor and pleasure to greet you on the behalf of the National Bank and to welcome you to today’s event held in our institution, marking together the beginning of this very important Twinning Light Project aimed at strengthening the capacities of the institutions involved in the system for fight against counterfeiting of euro. 

At the very beginning of my speech, I would like to express the gratitude of the National Bank to the European Union, because it has recognized the determination of our key institutions responsible for fighting money counterfeit to put their maximum in establishing a strong and efficient system for protection of the national, as well as the financial interests of the Union. Thank you, because the allocation of funds from the pre-accession funds for the implementation of this Project, means a trust that we are ready to work on strengthening the institutional capacity and on the mutual cooperation in order to implement the recommendations that will arise from the project activities. 

I am sure that we will justify the trust. Not only with the level of our commitment to the Project in the next eight months, but also with the willingness to implement all necessary activities for establishing a strong and efficient system for fight against counterfeiting of euro in the country. These activities are already outlined in the strategic commitments of our institutions, because our ultimate goal is to provide a system that, in all aspects, will be at the level of the system of a European Union member state. Only with full dedication, readiness and professionalism, the trust will be fully justified and we will prove that the Project was indeed successful – that the 250,000 Euros intended for its implementation were channeled in the right direction.

Expertise is to be built at multiple levels:

In the long run, this project will simultaneously be an investment for improving the operations not only of the National Bank and the Ministry of Interior, but indirectly also of other institutions that are actively involved in the system for fighting counterfeiting money: the Customs Administration, the Financial Police Office of the Ministry of Finance, the Public Prosecution Office and the judicial authorities. I believe that after the implementation of this Project, our interinstitutional cooperation in the field of monitoring and prevention of counterfeiting banknotes and coins will be further developed. I believe that very soon after the completion of the project activities, we will jointly state and announce that our national system for fighting counterfeit is at a higher level, compatible with the systems of the EU member states.  


Euro’s complexity is mindboggling…

India now faces its own version of Soviet Union’s scissors crisis

January 23, 2019

Mint newspaper and its website has done a makeover of sorts. Do take a look.

Anyways as long as columns from Niranjan of Cafe Economics continue in the paper, one is sure substance will continue as well.

In his recent piece, Niranjan compares the recent agri crisis to the one in Soviet Union 100 years ago:

Many who are interested in economic history may perhaps see the parallel between what is happening in India right now with what happened in a very different country around 100 years ago. This was the Soviet Union soon after the civil war that the communists eventually won. Political stability as well as the withdrawal of draconian controls over Russian agriculture led to a huge rise in food production. The weather also cooperated. Russia saw bumper harvests.

Food prices fell. The prices of industrial goods continued to rise. A graph of these two price trends resembled the two blades of a pair of scissors. Soviet commissars began to call it the scissors crisis. Farmers who were not getting enough for their output did not have money to buy what the factories were producing. Some farmers chose not to sell the crop at all. Soviet planners—in what Friedrich Hayek later described as a fatal conceit—tried to deal with this internal terms of trade problem with price controls on industrial goods.

The rest of the historical narrative is not important right now. What is important is the fact that India could now be facing its own variant of the scissors crisis—core inflation and food inflation are moving in different directions. Managing the relative price of food in terms of industrial goods will be one of the biggest policy challenges for the new government that will take charge of the country later this year.

One important response to the Indian scissors crisis will be to remove controls on Indian farmers—be it their ability to sell directly to consumers or the freedom to export. Modern rural supply chains could also help undermine the stranglehold of middlemen. Forward markets will reduce at least some of the price risk that farmers face. Data from recent years shows that Indian farmers facing high levels of uncertainty take cropping decisions based on past price trends rather than expectations of future prices, a pattern very similar to the cobweb model taught in introductory microeconomics courses.

However, the most potent solution to rural distress continues to be outside of agriculture. India needs to create jobs in productive enterprises so as to create opportunities for millions who seek to escape farming, where they are condemned to deal with the vagaries of the weather as well as wild fluctuations in prices.


How California stayed with gold when the rest of the U.S. adopted fiat money?

January 23, 2019

Brilliant JP Koning in this brilliant post looks at this 1861 US monetary history. In this case, California refused to adopt greenbacks which were used in other states and continued to accept gold payments.

We are ten years into the age of bitcoin. But people are still using national currencies like yen, dollars, and pounds to buy things. What does history have to say about switches from one type of monetary system to another? In this post I’ll dig for lessons from California’s successful resistance to a fiat standard that was imposed on it in the 1860s by the rest of the U.S.

Not long after the war American Civil War broke out in 1861, a run on New York banks forced most of the country’s banks to stop redeeming their banknotes with gold. A few months later Abraham Lincoln’s Union government began to issue inconvertible paper money in order to finance the war. These notes were popularly known as Greenbacks.

$1 legal tender note, or greenback

Thus the 19 states in the Union shifted from a commodity monetary standard onto a fiat monetary standard. But Californians, who had been using gold as a payments medium for the previous decade-and-a-half, chose not to cooperate and continued to keep accounts in terms of gold. As a result, California stayed on a gold standard while the rest of the Union grappled with fiat money.

This had very different repercussions for prices in each region. As the Union issued ever more greenbacks to finance the war, the perceived quality of these IOUs deteriorated. Through much of 1863 and 1864, their price fell relative to gold. Because prices in the Union were set in terms of greenbacks, consumer and wholesale prices rose rapidly.

U.S. Index of Wholesale Prices (NBER)

In California, on the other hand, prices continued to be set in gold. Thus Californians did not experience significant inflation during the Civil War.


Why so?

Why did the east so easily switch onto a fiat dollar standard whereas California continued to define the dollar in terms of gold? By the 1860s, most Americans who lived east of the Rockies dealt primarily in banknotes. These notes, which were issued by private banks and convertible into gold on demand, circulated widely. Gold coins, which were heavy and prone to wear, were largely confined to bank vaults.

But Californians had never been fond of banknotes. The 1849 First State Constitutional Convention had prohibited the chartering of banks and issuing of bank notes:

but no such association shall make, issue, or put in circulation
any bill, check, ticket, certificate, promissory note, or other
paper, or the paper of any bank, to circulate as money
[California, 1853 #64, Article IV, Section 34]

Suspicion of banknotes ran so strong in California that when businessman Samuel Brannan tried to establish a note-issuing bank in 1857, the following was printed in the Evening Bulletin:

Mr. Brannan, attempts to violate the Constitution of the State, and to fasten upon the community that most pernicious of all evils, a shin-plaster currency….The evils of shin-plaster currency are so great, and the wishes of nine-tenths of our people are so bitterly opposed to its introduction, that we call upon every individual who has any regard for the interest of our State financially or otherwise, to repudiate Mr. Brannan and his shin plasters. (Cross, 1944)

According to Cross (1944), people referred to banknotes as shin-plasters because they were about the size of the plasters put on the injured shins of farmers and other outdoor workers.

Needless to say, Brannan’s notes never took hold. In place of banknotes, Californians had always preferred to pay each other with physical gold. With the discovery of the yellow metal in 1848 in California, the state had plenty of the stuff. Gold dust, despite its inconvenience (see below) was a popular early medium of exchange. Later on, private and government-issued gold coins also became important. Non-chartered private banks existed, but they issued only deposits, not notes.


He says same thing goes for bitcoin as well.

Californians rejected the greenback because they had long adhered to gold as a form of payments. Any given merchant expected the rest of the mercantile community to continue paying with gold coin, which made it costly to adopt greenbacks. The reverse happened in the east, the monetary system tipping towards the more familiar banknote. Even as the greenback inflated, easterners still preferred to set prices in terms of paper. It was too costly for an individual merchant to shift onto gold given that every one else already accepted paper.

This same stickiness explains why new technologies like bitcoin haven’t got much usage as a way to pay. It also accounts for why Venezuelans have been slow to shift away from a bolivar monetary system to a dollar-based one despite the collapse of the bolivar. When groups of people collectively adopt a habit, this habit is very difficult to change.


100 years of Wagh Bakari Tea

January 23, 2019

Yesterday’s Times of India Ahmedabad edition had a full 2-page spread celebrating 100th anniversary of the city’s famous brand: Wagh Bakari Tea.


Can a tiger change its stripes? Reform of Chinese state-owned enterprises…

January 23, 2019

Profs. Ann Harrison, Marshall Meyer, Peichun Wang, Linda Zhao, and Minyuan Zhao in this paper:

The majority of state-owned enterprises (SOEs) in China were privatized through ownership reforms over the last two decades. Using a comprehensive dataset of all medium and large enterprises in China between 1998 and 2013, we show that privatized SOEs continue to benefit from government support relative to private enterprises. Compared to private firms that were never state-owned, privatized SOEs are favored by low interest loans and government subsidies. These differences are more salient with the Chinese government’s trillion-dollar stimulus package introduced after the 2008 global financial crisis. Moreover, both SOEs and privatized SOEs significantly under-perform in profitability compared to private firms. Nevertheless there are clear improvements in performance post-privatization. The tiger can change its stripes; however, the government’s behavior seems to be sticky.


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