Rules and central banking

Here is a really nice cartoon representation of the Taylor rule (pointer from John Taylor himself). Homework: what does each part mean?

On this subject, and economics twitter, former and current members of the UK Monetary Policy Committee are publically attacking each other – see here:

Sentance is a hawk, Blanchflower (from Britain but a professor at Dartmouth) very much a dove, and a critic of the current British government.

Journalist Mike Bird summarises their exchange: control of monetary policy is a vast amount of political power – do we really have to give it to these people? It is a joke, but the role of fixed rules in monetary policy is a serious topic in macroeconomics. Chris Dillow gives brief and amusing recap of arguments in the discretionary/rules debate.



Suddenly lots of stuff is happening in China, at least based on media coverage. Here are some interesting articles that have come out recently, and quick summaries:

From Tyler Cowen. We are seeing a phase of centralisation. Some of the freedom of expression enjoyed by Chinese academics is being restricted.

Again HT Tyler Cowen. Roderick MacFarquhar argues that Xi Jinping is the most powerful Chinese leader (at least in terms of fewest powerful internal rivals)  since Mao, more so than Deng.

(If this is true, then it makes Deng look even better, that or the situation of China in the late 1970s even worse.)

Administrators in the British Raj would often boast how, in a government ruling 250-300 million people, there were only 1000 British civil servants and c.15,000 British military officers. Of course, for every British administrator there would be dozens of Indian subordinates – the boast is double-edged: ‘look at how many collaborators we have’/’look at how many collaborators we need’.

Excluding State-Owned Enterprises (which are huge): “China has only 31 government and party employees per thousand residents.  The number of civil servants per thousand residents in France is 95, in the United States, 75, and in Germany 53.” And, of course, the CCP itself has chapters in every company (every Wall-Mart store), comprising up to 10% of the population.

How do you launder money in China? Anne Stevenson-Yang has your answers. They include: insurance payouts, over-generous buyouts from overseas holding companies, assets without a clear value such as art, Macao casinos or just bribing the customs officials. Click through for more.

Chinese local governments depend on land sales for a great deal of their revenue. Turns out China’s property market is peaking, and local governments are running out of land to sell. Say Deutsche Bank analysts: “Our baseline case assumes land sale revenue to drop by 20% yoy in 2015.” In response, the central government will have to ease monetary policy. Deutsche: “We forecast two interest rate cuts and two RRR cuts in 2015. The risk is that there may be more rate and RRR cuts than we forecast.” Indeed we already have one of these a month later.

Although Mark Dow notes that Chinese monetary authorities target credit growth, and that reserve requirements are just one tool (they are happy to use ordinary Open Market Operations, and sterilise, or not, residual balance of payment inflows)

The latest sign that China’s financial system is facing a cash drain

Here is more context on the monetary policy of China. How do you go about sinking your own currency? If subsidising exports through a low yuan, it means the exporters receive more yuan for good than their goods are worth. China needs very high reserve requirements to sterilise these yuan and control inflation. (Pay attention, Eurozone.)

Again hat tip to the indispensible FTAlphaville blog. On China and the prostitution industry: in a land where it is unwise to depend on the legal systsem, other mechanisms of creating trust between business partners and local authorities must be found. Apparently the solution is group trips to brothels: “And when it comes to building up mutual trust, the photos often taken during these miniature orgies provide a rich source of mutual blackmail material that can prove explosive if exposed.”

From 2013, an article on how de Tocqueville’s L’ancien regime et la revolution – key quote: “the most dangerous time for a weak government is when it sets about reforming itself” – is a bestseller in China, with Li Keqiang personally recommending it to his colleagues

Linden, Kraeler and Dedrick (2007) find that China adds $3.70 to the value of an iPod, compared with Apple’s profit margin is $80, for an iPod at that time. I imagine China’s share has increased a bit in the eight years since. High technology manufacturing is a top strategic priority for the government. But here is an example of a more general phenomenon: an environment where skills, capital and demand coincide, to create a productivity leader.

Mark Pettis teaches at Beida (Peking University), and he can go on a bit. The key part is that in China if you lower interest rates, Aggregate Supply may rise faster than Aggregate Demand, causing deflation/disinflation. Read that sentence again.

The mechansim is that most lending is done to businesses, and lowering interest rates will mean they have cheaper credit and can build more capacity. Meanwhile, interest from savings are quite important for consumers (what with China’s high savings rate). If savers receive less they will spend less.

This is worth worrying about. If the Fed or the ECB eases monetary policy, it forces China to respond to protect its exporters. But if you think that the root cause of the Great Recession/Stagnation is that Global aggregate supply has been rising higher than Global aggregate demand for the past fifteen years (and everything that has happened is just swapping these two between different countries), this means monetary easing will not help.

And finally (from Pseudoerasmus). The Tang empire borders extend too far. They never controlled that much of Vietnam and Manchuria at the same time. (And Manchuria only through tributaries.) But understand and reflect: we have very good census data for China going back two millenia.

Charlie Hebdo

This is not something we ever wanted to write. Wednesday was the worst terrorist attack in France for half a century. But the issues of absolute freedom of expression and the extent of violence to which lone extremists are capable are crucial to understanding society in our era. Here are some of the most considered responses:

“Reproducing the imagery created by the murdered artists tends to sacralize them as embodiments of some abstract ideal of free speech. But many of the publications that today honor the dead as martyrs would yesterday have rejected their work as tasteless and obscene, as indeed it often was. The whole point of Charlie’s satire was to be tasteless and obscene, to respect no proprieties, to make its point by being untameable and incorrigible and therefore unpublishable anywhere else. The speech it exemplified was not free to express itself anywhere but in its pages. Its spirit was insurrectionist and anti-idealist, and its creators would be dumbfounded to find themselves memorialized as exemplars of a freedom that they always insisted was perpetually in danger and in need of a defense that only offensiveness could provide. To transform the shock of Charlie’s obscenities into veneration of its martyrdom is to turn the magazine into the kind of icon against which its irrepressible iconoclasm was directed. …

“In mourning the tragedy, let us not forget that Charlie Hebdo was shocking, obscene and offensive because the world is — as today’s shocking, obscene and offensive tragedy makes clear.”

“There is no duty to blaspheme, a society’s liberty is not proportional to the quantity of blasphemy it produces, and under many circumstances the choice to give offense (religious and otherwise) can be reasonably criticized as pointlessly antagonizing, needlessly cruel, or simply stupid.

“But we are not in a vacuum. … the kind of blasphemy that Charlie Hebdo engaged in had deadly consequences, as everyone knew it could … and that kind of blasphemy is precisely the kind that needs to be defended, because it’s the kind that clearly serves a free society’s greater good. If a large enough group of someones is willing to kill you for saying something, then it’s something that almost certainly needs to be said, because otherwise the violent have veto power over liberal civilization, and when that scenario obtains it isn’t really a liberal civilization any more. Again, liberalism doesn’t depend on everyone offending everyone else all the time, and it’s okay to prefer a society where offense for its own sake is limited rather than pervasive. But when offenses are policed by murder, that’s when we need more of them, not less, because the murderers cannot be allowed for a single moment to think that their strategy can succeed.”