Show me the money

Why is inflation rising in Kazakhstan?

Last month the central bank of Kazakhstan raised interest rates to discourage spending that is boosting prices. The National Bank targets the rate of increase in prices, inflation, at 4% to 6%. In August, consumer prices were rising by 5.5% per year and were threatening to accelerate to nearly 6% by the end of the year. So the National Bank raised the base interest rate―which is the benchmark rate for Kazakhstan’s economy―by a quarter of a percentage point, to 9.25%. This is a new direction for the Bank. In April, it lowered the base rate from 9.25% to 9%, less than two months before the presidential election.  Bank officials next meet on Monday, October 28.

Raising the interest rate can moderate inflation by making it expensive for people to borrow money to spend. The drop in spending eases pressure on prices. The Bank is being sensible. Last summer, consumer loans in Kazakhstan rose by nearly a fourth.

The Bank attributes the rise in inflation partly to boosts in government spending.  For a decade, Nur-Sultan has been running a deficit – that is, the government has been spending more money than it takes in.  Now the deficit amounts to about 7% to 8% of the economy (as measured by gross domestic product), according to the International Monetary Fund. (These calculations exclude oil revenues.)

The Bank says import and food prices also spur inflation. Meat prices for Kazakhstani exporters this year rose by more than a third. Naturally, this will increase the prices that meat sellers demand in Kazakhstan.

As usual, the Bank’s press release didn’t say a word about the inflationary factor that Bank Governor Yerbolat Dosaev should have most firmly under his thumb―money supply. For January through July this year, tenge currency was up 14.3% since the same period last year; and M1, which includes checking accounts as well as currency, rose 10.8%. In other words, the supply of tenge is increasing much faster than output; so more tenge are chasing, say, a bottle of water than did last year. It is not rocket science to conclude that prices will rise.

The Bank did indirectly refer to this problem. Since June it has sold securities for tenge and thus has withdrawn excess tenge from circulation. That should ease inflation―and, incidentally, strengthen the tenge on the foreign exchange market, where the exchange rate per US dollar is an eye-popping 390 and picking up speed.

Still, the Bank could improve the accuracy of the public’s expectations of inflation, by owning up to its corpulent money supply. With Bank estimates of the future supply of tenge, Kazakhstanis could better plan their purchases, and they would not be shocked by sudden spurts of inflation. But...that would mean that the Bank would have to admit its mistakes, wouldn’t it?—Leon Taylor tayloralmaty@gmail.com

References

International Monetary Fund.  Kazakhstan: staff concluding statement of an IMF Staff Visit.  17 July 2019.  www.imf.org

National Bank of Kazakhstan. Monetary base and aggregates of broad money. Retrieved 5 October 2019. www.nationalbank.kz

National Bank of Kazakhstan. The NBRK Governor Y. Dosayev statement on the base rate of the National Bank. 9 September 2019. www.nationalbank.kz      

The boomerang of trade

Anyone up for a free lunch? Two United States Senators are. A new bill, from Tammy Baldwin (a Democrat from Wisconsin) and Josh Hawley (a Republican from Missouri), would mandate the country’s central bank to zero out the current account. In effect, the Federal Reserve would often have to ensure that exports equaled imports; that the amount that the US sells to other countries equals the amount that it buys from them. Congress has already charged the Fed with creating jobs and cutting prices.

The Fed is powerful but not omnipotent: It cannot satisfy all three mandates. Suppose, for example, that the world economy slows down. US exports would fall, pulling down US income and spending. Under the trade policies that the US now has, this need not be a calamity, because the exchange rate can adjust: The demand for the US dollar would tumble, so its exchange rate would weaken. A euro could buy more bucks than before. This would lower the euro price of US exports, so Europeans would buy more autos from Detroit. US income would rise again. The auto exports would offset the loss in US exports that was due to stagnation of the world economy.

But under the new Senate bill, the global slowdown could imperil the Yanks, because the bill effectively requires the Fed to set the exchange rate at the level where exports equal imports. As the US began selling more cars to the Spanish, its balance of trade would rise; that is, exports would increase relative to imports. But the Senate bill wouldn’t permit this for long.  It would require the Fed to strengthen the dollar, in terms of euros, so that the balance of trade would go back to zero, where exports equal imports. This would have a nasty consequence: To boost the euro value of the dollar, the Fed would reduce the supply of bucks. This would leave Americans with fewer dollars to spend, so spending would drop. US production would fall again, on top of the reduction that was due to the global slowdown. In short, the commandment to zero out the current account would make matters worse, at least in the short run.

Beat the heat

“No problem!” the senators might say. “We’ll just rewrite the bill to permit trade surpluses and prohibit trade deficits!” Suppose that they do. Now consider a global boom. World income would ascend, raising world demand for American exports. If the US economy is already running on all cylinders, then it won’t be able to produce much more for long. Workers will demand pay for overtime, which will raise production costs and prices. Inflation will rear its dastardly head.

If exchange rates can change easily, then the overheating of the Yankee economy will be temporary. The global boom increases the demand for the US dollar, so it would buy more euros than before. The euro price of auto exports from Detroit would go up, so the Spanish would buy fewer Chevys. In general, the reduction in US exports that was due to the stronger dollar would offset the rise that was due to the global boom. US output would drop back to the level that it could sustain, and US prices would no longer rise.

But the Senate bill would give us a different story. As the dollar strengthened under the global  boom, the Fed would perforce weaken it again by creating more bucks. Americans would try to spend them, heating the economy even more. Inflation could get out of hand.

One implication of the Senate bill for Kazakhstan is that the Fed would determine the tenge’s exchange rate.  The National Bank of Kazakhstan would no longer be free to stimulate the Kazakhstani economy by increasing the number of tenge that trade for a dollar.  The boomerang of trade could harvest a few unwary heads in Nur-Sultan and Almaty.--Leon Taylor, tayloralmaty@gmail.com

  

Reference

David J. Lynch. Senators pursue foreign investor tax, saying goal is competitive U.S. dollar. The Washington Post. July 31, 2019. Online.

Belyanin on 21st-Century capital, Part II

https://notes-from-the-golden-horde.blogspot.com/2019/05/a-review-of-capital-in-twenty-first.html

The bull in China’s shop may just be trade

Observers attribute the recent sea changes in international investment by the Chinese to politics. Thus Beijing pursues the Belt and Road initiative in Central Asia to supplant Moscow as the region’s prime influence. And it finances fewer factories in the United States than before because of the hostility towards it of Donald Trump’s administration. The New York Times writes, “Growing distrust between the United States and China has slowed the once steady flow of Chinese cash into America, with Chinese investment plummeting by nearly 90 percent since President Trump took office.”

In reality, the new patterns in investment may simply result in part from trade. If the Chinese accumulate tenge because they sell more goods to Kazakhstan than they buy from it, then they’ll invest them here, since tenge have no value elsewhere. The Belt and Road initiative may stem partly from China’s trade surplus with Central Asia, when it is widening. (Direct investment by China in Kazakhstan, net of investment bv Kazakhstan in China, rose $157 million in the first quarter of this year, according to the National Bank of Kazakhstan.) And the decline in its investment in America (relative to United States investment in China) may come about because Beijing’s trade surplus with the US is narrowed by Trump’s tariffs. For January through May 2019, China’s surplus in trading goods with the US had fallen to $137 billion, a tenth below the $152 billion for the same period in 2018, according to the US Census Bureau.

Macro matb

A bit of math may clear matters up. Consider two simple verities. First, we can do one of three things with our income: Spend it, save it, or pay taxes with it:

Y = C + S +T

where Y is income, C is consumption, S is savings, and T is taxes.

Second, we earn our income by selling to one of four sources:  Households (which buy consumer goods), firms (which buy investment goods like lathing machines), the government, or foreigners:

Y = C + I + G + X – M

where I is real investment (that is, investment in physical capital, not in financial capital like stocks), G is government spending on goods and services like jet fighters, X is exports, and M is imports. The trade surplus―the amount that we sell to foreigners, minus the amount that we buy from them―is exports minus imports, or X – M.

We have two expressions for Y, so equate them:

C + S + T = C + I + G + X - M.

Eliminate the common factor C and rearrange:

S – I = (G – T) + (X – M).

Finally, for simplicity, suppose that the government balances its budget. That is, the amount that it spends (G) just equals the amount that it collects (T). Then G - T = 0, and we get

S – I = X – M.

The left-hand side is the savings surplus―the amount that we save but don’t lend out to firms at home. The right-hand side is the trade surplus. The equation implies that the amount of money that we net in trade (exports minus imports) must be lent to foreigners because domestic firms don’t want it (domestic savings alone already exceed domestic investment).

Now consider this equation from China’s point of view. It long racked up a trade surplus with the US, piling up dollars that it could invest only in America. Suddenly, the Trumpists tax exports from China. Beijing’s trade surplus with the US, X – M, falls. That implies a shrinkage in the trade “profit” that China can invest in the US. In other words, the fall in Chinese investment in the US is not necessarily political retaliation. It may partly result from the fact that the Chinese have fewer dollars now to invest in the Rust Belt of the American Midwest.

By the same token, when China’s trade surplus with Kazakhstan expands, it accumulates tenge that it can invest only here―say, by building an east-west highway. This investment is not necessarily an attempt to dominate Kazakhstan politically.

One last point. The New York Times writes that “Mr. Trump’s penchant for imposing punishing tariffs on Chinese goods...(has) scared businesses in both countries.” Were potential tariffs the problem, Chinese investors could avoid them by constructing plants in the US to sell to Americans directly. Chinese foreign direct investment in the US would rise. The more likely problem is that the tariffs already in effect have cut the number of dollars that the Chinese can earn and subsequently invest in America.―Leon Taylor tayloralmaty@gmail.com

References

Alan Rappeport. Chinese money in the U.S. dries up as trade war drags on. The New York Times. July 21, 2019.