No way out now

                                           A new Arab Spring?  Photo source: The Syrian Observer 

Renewed civil war beckons in Syria, unnoticed by the American news media.

The central bank no longer has US dollars to defend the Syrian pound, which has plummeted to 15,000 pounds per dollar. Prices are more than doubling every year, and the pace is accelerating. Well more than 90% of the population is poor even by the World Bank standard of $2.15 per day (using 2017 prices).

Under the dictatorial President Bashar Assad, Damascus has responded to the hyperinflation by nearly doubling fuel prices and cutting back on military salaries. Public salaries have dropped to as little as $7 to $10 per month, and the government in most of the country is at a standstill. The only remaining domestic supporters of Assad, the elite, are revolting. Organizing via Facebook, the students in al-Aswayda Province have shut down the schools. Youth protests are also mounting in the southern province of Daraa. The Druze lead protests in certain areas.

Assad long was supported, and instructed in the art of brutality, by the Russians, who enabled Assad to dominate the civil war that broke out in the pro-democratic Arab Spring of 2011. The Russians are still bombing the opposition in the northeast, among more than 450 Russian raids this year, according to the White Helmets, a Syrian rescue group. But the most effective Russian forces in Syria were the Wagner group, now in disarray after the assassinations of their two leaders in a plane crash near Moscow this week. That leaves Iran as Assad’s only real ally. For weeks he has been edging towards Tehran, which gives him oil and dollars (the latter through joint banks). Will they insist on giving him military support as well?

Israel wouldn’t condone an expanded Iranian presence without a fight. It already bombs Syrian airports with some regularity, interfering with a few humanitarian routes into the country. So…where are the Americans?

Close to the thick of the fight. The head of Central Command, General Michael Kurilla, this week visited two major refugee camps in northeast Syria, an opposition area, to express solidarity and to meet with the 100,000-member Syrian Democratic Forces, largely Kurdish. Ostensibly, the main American goal is to thwart Daesh (the Arabic acronym for the Islamic State) by working with the terrorists’ Kurdish foes -- to the dismay of Turkey, which regards Kurdish nationalists as terrorists itself. Confused by the complex conflict, and perhaps making a gift of Middle Eastern power to his friend in the Kremlin, former President Donald Trump had ordered withdrawal from Syria.  But he countermanded this command after the military recommended "guarding" the Syrian oilfields in the northeast. "Oil" is the magic word to Trump. Now reportedly the Americans are quietly organizing opposition to Assad through tribal groups in Syria.

One of two outcomes seems likely. Most probable, I think, is that Iran will take charge in Damascus. Regional conflict and perhaps regional war will follow, pitching Iranian Shiites against Sunnis in neighboring countries like Saudi Arabia. Most of the 19 million Syrians would likely starve in the resulting neglect.

The other possibility is that Assad will see the light and work with the Arab League to settle differences with the opposition to the extent that he can remain in power. This would mean cooperating more genuinely with the United Nations on humanitarian aid; restoring fuel subsidies and military salaries; and extending aid to non-opposition Syrians who, according to the UN humanitarian agency, already cannot afford much food, especially in the wake of Russian blockage of Ukrainian wheat exports.

These salutary measures would require a credible dollar reserve at the Syrian central bank, which has bungled monetary policy for more than a decade; and foreign aid, superficially perhaps through the Arab League -- but really from Saudi Arabia and even the US and Israel, none of whom want to see Iran become the major player in the Middle East. – Leon Taylor, Baltimore tayloralmaty@gmail.com

 

Notes

I thank Nick Baigent, Annabel Benson, Mark Kennet, and Forest Weld for helpful comments.

 

References

The Syrian Observer.   Various issues.  Main - The Syrian Observer

The Syria Report. Various issues.  Syria Report – Economy, Business and Finance – Syria and the Middle East (syria-report.com)

The Prigozhin effect

 

                                            Forgot the flight insurance.  Photo source: Reuters.

 The apparent assassination this week of Vladimir Putin’s chef and rival, Yevgeny Prigozhin, who led a mutiny against the Kremlin two months ago, strengthened the Russian President’s grip on power. Presumably, this will stabilize Russia politics for the nonce. So one would expect the ruble to gain value relative to other currencies.  For example, Russian investors looking for somewhere to park their funds may reinvest in Russia, raising the demand for rubles.

And indeed the exchange rate of rubles per dollar fell sharply on the news yesterday of Prigozhin’s plane crash, from about 95 rubles per dollar to 94. Since then, it has recovered to 94.5: The plane crash was a big deal, but not that big. 

And curiously, most of the movement in the ruble occurred several hours before the plane crash was widely known in the US or Europe.  Prigozhin's plane left Moscow about noon UTC Wednesday and crashed shortly thereafter.  The ruble began climbing about 12 hours later and slowed down by 3am UTC, about an hour before Reuters reported the crash. Hmm…

But although the ruble gained in dollars, it lost in tenge.  It fell from 4.9129 tenge at 12:30 UTC to 4.8286 at 3am August 24. (The table below gives the equivalent times in Washington and Almaty.) The ruble strengthened to 4.8806 tenge at about 6am August 25. But it remained below the value that prevailed before news of the plane crash.

Event	UTC	EDT	Almaty time
Ruble rises in $	12:30, August 24	8:30pm, August 23	6:30am, August 24
Ruble rise ends	3:00am, August 24	11pm, August 23	9am, August 24
Most recent report	6am, August 25	2am, August 25	Noon, August 25

 

This is intriguing. It is not likely to be due to intervention by the National Bank of Kazakhstan in the foreign exchange market.   The Bank does not release statistics of interventions until after a month, but this is probably not the sort of event that would trigger its interference.  In fact, the Bank reports no purchases or sales in the domestic forex market since December 2022 at least, in its commitment since 2015 to keeping its mitts off the tenge exchange rates. So the reason for the weakening of the ruble vis-à-vis the tenge must lie elsewhere.

One possibility, if I may speculate, is that the consolidation of Putin’s position makes more possible that Putin’s War will continue. Another draft may be in the works. Especially with the loss of Prigozhin’s Wagner group, which had recruited prisoners, such a draft may call up young, educated Russians. Anticipating this, they would flee to Kazakhstan, selling rubles in exchange for tenge. The ruble would weaken in terms of tenge.

These curious shifts come in the wake of the desperate attempt August 21 by the central bank of Russia to shore up the ruble by jacking up the interest rate by 3.5 percentage points to 12%. Western sanctions and softening oil prices had undermined the Russian currency. The higher interest rates in Russia did indeed boost demand for the ruble, so the exchange rate of tenge per ruble rose a few days ago.

Now the ruble is falling in tenge. This might be in part an adjustment to the over-reaction to Moscow’s hike of its interest rate, which the National Bank of Kazakhstan, with its eye on the long run, sensibly refused to follow. In fact, the National Bank has cut the base rate by a quarter-point to 16.5%, effective Monday, August 28, as inflation in Kazakhstan keeps falling. The tenge is already weakening noticeably in dollars, from 461.81 Wednesday to 464.84 at 11:19am Friday UTC. Zowie! One reason is that an investor will sell tenge and buy other currencies as their relative rate of return rises due to the fall in Kazakhstani interest rates. – Leon Taylor, Baltimore tayloralmaty@gmail.com

Notes

For useful comments, I thank Dmitriy Belyanin.

  

References

Google Finance. The exchange rate of rubles to dollar. https://g.co/finance/USD-RUB?window=5D

Google Finance.  The exchange rate of tenge to ruble.  https://g.co/finance/RUB-KZT?window=5D

Google Finance. The exchange rate of tenge to dollar.  https://g.co/kgs/NGii4J

National Bank of Kazakhstan.  Data on interventions of the NBK | National Bank of Kazakhstan

Reuters. Wagner boss Yevgeny Prigozhin listed in Russian plane crash with no survivors | Reuters

Can Bidenomics pay off?

 

                      Master of Bidenomics...or mastered by it?  Photo source: White House

The Fitch ratings agency downgraded US government bonds last week, saying Uncle Sam was not as reliable a borrower as he once was. The downgrade may raise the cost to the government of borrowing, because creditors may demand a higher rate of return -- that is, a higher interest rate -- to compensate for the loss of credibility.  Well, maybe. Treasury bonds are still highly credible.  The burning question is whether Fitch was right to say that the government has taken on too much debt. 

The White House scoffs that public debt does not harm the economy. Such investments as roads and universities enable us to produce more than before, argues the Biden Administration. They don’t drag down the economy; they accelerate it.

Of course, some public investments do pay off. We couldn’t have an economy without the protection of the military. The question raised by Fitch was whether most public investments pay, where “investment” refers to anything that the government finances by borrowing. The largest categories in Uncle Sam’s spending are Medicare and Social Security. Medicare invests in health; Social Security, in the quality of retired life. Undoubtedly such investments help us live better. But do they grow the economy?

 

A simple way to answer this question is to look at the ratio of public debt to GDP over the long run. If public investments pay off, they should raise output by more than is necessary to pay off the loans. The ratio of debt to GDP should fall over time.

 

In the figure below, the debt share of GDP has risen fairly steadily since the early 1980s, in the Reagan years, when Congress borrowed heavily to fight a severe recession. The debt share falls in the late Nineties, when the economy computerized and the federal budget went into surplus in the late Clinton years.  But it has risen ever since -- save after 2020, when the government stopped spending so heavily to fight the pandemic recession. Yes, MAGA Republicans, the debt share actually fell in the Biden years.

 

But in general, there is no evidence here that public investment has saved the economy. To the contrary.

 

Of course, public investment is not the only factor immediately affecting GDP. Business cycles, wars, immigration, demographics, and serendipitous innovations all play a role. But if the federal government eventually responds to these challenges with useful projects, then the debt share should fall over the course of decades. And it clearly does not. – Leon Taylor, Baltimore tayloralmaty@gmail.com

 

     

     

  Source of graph: St. Louis Fed

Reference

Spencer Jakab. The Scary Math Behind the World’s Safest Assets - WSJ. Wall Street Journal. August 1, 2023.

Hard heads, soft landings

                                            Photo: Getty Images

Is the US economy headed for a soft landing – that is, for an easing of inflation (the average rate of increase in prices) without more unemployment?

Former US Treasury Secretary Lawrence Summers doubts it. "The idea that bringing down inflation has nothing to do with increasing unemployment runs different from all conventional macroeconomic assessments.”

Well, let’s see. In the usual model, there is indeed a tradeoff between unemployment and inflation, given the inflation that people expect. If inflation is higher than expected, then workers will demand pay hikes to cover the higher cost of living. Employers will resist with layoffs.

But if expectations of inflation fall, the whole relationship between inflation and unemployment changes. Every rate of unemployment can occur with lower inflation than before.  This is because workers no longer expect such steep increases in the cost of living, so they don’t demand such high pay hikes. Employers are willing to accommodate their moderate demands.

The upshot is that in principle, the labor market can continue to clear but at lower inflation, with no change in unemployment. In theory, a soft landing is perfectly possible.  The Fed "just" needs to lower expectations of inflation.

But today those expectations are stubbornly high. The Survey of Consumer Expectations at the New York Fed indicates that people have been anticipating about 4% inflation for a year, double their expectations in 2020.  True, expectations have fallen for three months, but only slightly.

Another bit of discouraging news is that, unusually, long-term interest rates have fallen below short-term rates.  This usually signals a recession. The idea is that investors expect a recession to cut spending and thus cut the demand to hold money.  This would lower the price of borrowing money, which is the interest rate. This may occur because investors expect the Fed to try to cut expectations of inflation by raising interest rates now (as indeed it is doing) and lowering them later when unemployment rises. This would explain the pattern that we observe today: High interest rates today, expectations that low rates would occur years later.

But the matter is not so clear. Expectations of higher unemployment haven't changed much for a year. Only about 40% of survey respondents expect unemployment to rise, and the share is dropping slightly, according to the New York Fed. This doesn’t suggest that the typical person expects a recession.

As always with the national economy, any prognostication is a judgment call.  I wouldn't rule out a spike in unemployment in 2024. But neither would I expect it, as long as the Fed continues to signal that it won't let inflation rise. The Fed’s sudden if belated boosts in interest rates have been accompanied by a halving of inflation in a year. I think it’s succeeding.

The key is that the wage, adjusted for inflation, is rising while job gains are falling. The labor market is heating up, and the resulting clamor for pay hikes causes employers to think twice about creating jobs. But this need not cause unemployment to skyrocket. It's a natural adjustment of the labor market to a rise in labor demand.

The informal forecast of an unemployment spike usually draws upon our awful experience in the Seventies and early Eighties, when annual inflation hit 13.5%. The Fed had not been in the habit of controlling the money supply, and expectations of inflation spiraled out of control. To cope, the new Fed governor, Paul Volcker, jacked up interest rates to record levels, engineering a deep recession. This convinced people that the Fed meant business, and expectations of inflation fell. 

Today, thanks partly to Volcker, neither inflation nor expectations of it are nearly as high as before. It need not be the case that cutting inflation to 2% now will require a major recession.  People have already seen what the Fed is capable of doing.  

I suspect that as long as the Fed is careful, we can have a soft landing.  But I’ve been wrong before.  After all, I’m a journalist. -- Leon Taylor, Baltimore tayloralmaty@gmail.com

 

References

Jeff Stein. Larry Summers was Biden’s biggest inflation critic. Was he wrong? - The Washington Post

Survey of Consumer Expectations - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org)

 

Don't keep on truckin'

                                            Yellow retires its wheels. Photo source: AP

The business reporters, with their usual charming innocence, tell us that the reasons for Yellow Trucking's demise can be found in Yellow and union press releases. The union killed us, says Yellow. Mismanagement, says the union. 

Yellow's problem is that it cannot pay off debts and workers. It can't find investors to cough up the cash. Granted, this may be because Yellow executives need a clue or the Teamsters went too far.  But the truth is probably simpler: Trucking has been on the skids for four years. 

Figure 1 shows the ratio of the freight index, which measures freight volume, and which trucking dominates, to gross domestic product, which measures the value of US output. The freight share of GDP has fallen steadily since the beginning of 2019.  The New York Times suggests that trucking has increased, especially small truck firms. But what matters is the relative demand for trucking, since investors will look for the industry that gives them the best return to their moolah. The relative demand for trucking is shown by Figure 1. It has been falling since even before the 2020 recession. 

Now suppose that the relative demand for the segment of the trucking industry that includes Yellow is rising.  Also suppose that investors think that this segment can withstand the overall decline in trucking in years to come.  And yet they pass on investing. Then the case for feckless executives or union leaders strengthens. But one must first check out the "supposings." 

In fact, relative demand for freight has risen over 17 years.  As a function of quarters, relative demand since 2007 follows the regression equation .9008 + .0006 Quarter. That is, over 10 quarters, relative demand rises by three-fifths of a percentage point. The chances that there is really no time trend are virtually nil. (Note for stat fiends: The P-value for the Quarter coefficient is .0009.)

Why do people demand more freight over time? One reason may be that they are growing richer, so their time becomes more valuable. We have only 24 hours a day but may have any amount of money. To save time, people may order online rather than drive to the stores. And the growing convenience of online shopping may induce us to shop more.

Yes, a lot more is going on here than just the passage of time, which accounts for only a seventh of the fluctuation that occurs in relative demand from quarter to quarter. As we'll see, the business cycle matters. Still, there is no obvious reason here to dismiss freight as a good investment to hold for years. Since investors passed up this opportunity, they either are mesmerized by short-run returns or worried about clueless business leaders.

Figure 2, from the US Bureau of Economic Analysis, shows that freight suffers more than most industries from recession (depicted by the gray columns). Yellow borrowed $700 million (million, New York Times, not billion) in the pandemic of 2020 but never recovered. Yet another bailout success story to warm the heart, and one that strengthens the suspicion of incompetence in the swank offices of Yellow or the Teamsters.

Finding the basic data for this analysis took all of 90 seconds. 

When a firm or union knows that a story about it will hit the headlines, it will take advantage of this to make political points of its own. But not even the stenographers of The New York Times have to lap it up. They can do the numbers. -- Leon Taylor, Baltimore, tayloralmaty@gmail.com 

Data source: US Bureau of Economic Analysis

Data source: US BEA

Reference

Peter Eavis. Trucking Giant Yellow Is Bankrupt, and Finger-Pointing Begins - The New York Times (nytimes.com)  August 7, 2023.

Mistaking the mistake

                   Would you buy a used car from one of these men?  Photo source: Business Insider

The Times’s coverage of political surveys is improving. At least it seems to recognize what a margin of error is. If anything, it may recognize it too much.

The story cited below is an example. Senator Tim Scott of South Carolina has a “favorability rating among Iowa Republicans – 70 percent – [that] is on par with Mr. [Donald] Trump’s 72% and just behind Mr. [Ron] DeSantis’s 77 percent.”

This is not ridiculously wrong, but it’s still wrong. In fact, Ron DeSantis, the governor of Florida, probably has a good lead on Scott. The reporter’s gaffe is to treat the survey’s margin of error, which measures the potential errors in the conclusions, as if it were part of the estimates that led to the conclusions. Wait, I’ll explain.

The story is about a survey of Iowans who are likely to attend the Republican caucuses for President in January. We can’t survey all the likely caucus-goers, if only because we don’t even know who they are yet. So we must take a sample – of 432 respondents, in this case. But no sample is a perfect mirror of the population from which it is drawn. (In this case, the population is all likely caucus-goers in Iowa). So our conclusions from the sample – for example, about the size of Trump’s lead over DeSantis – won’t be exactly correct. The question is whether our error is likely to be large enough to matter.

The size of our error depends on the dispersion in the population. Suppose, for example, that all caucus-goers are virtually the same.  Then any sample of them is probably pretty good. On the other hand, if they are over the map in voting preferences, then we may easily draw an extreme sample. 

So: How can we measure the dispersion in the population? Unfortunately, since we can’t observe the exact population, we can’t directly measure its dispersion. But we can measure the dispersion in the sample. So we can base on it our estimate of the dispersion in the population. If the sample is highly dispersed, then the population probably is, too, and chances are good that any sample will mislead us. 

The “margin of error” measures the dispersion in the sample. When this value is large, we should be cautious about drawing conclusions from the sample.

In the survey at hand, the margin of error is 5.9%. Suppose that 50% of respondents like Smith and 49% like Wesson.  Then we cannot conclude that more Iowans like Smith than Wesson, because 1% is within the margin of error. On the other hand, if 55% like Smith and 45% Wesson, then we can reasonably conclude that more Iowans prefer Smith, since 10% is outside the margin of error. Statisticians usually pick the margin of error that ensures that chances of wrong conclusions from the sample are less than 5%.

In the survey, DeSantis’s favorability rating is 77% and Scott’s is 70%. This is a 7% difference, which is outside the margin of error. So, yes, Iowans probably view DeSantis more favorably than Scott. But 7% is close to 5.9%, the margin of error. Does this mean that DeSantis has only a bare advantage over Scott?

No!

The margin of error measures the confidence that we can put in a conclusion. It does not enter the conclusion directly. Our best estimate of DeSantis’s edge is 7%, not 1.1%.

A silly example may clear this up. Suppose that I would like to estimate the unemployment rate in New York City. I stand on 8^th Avenue and interview one person. He says he’s unemployed. I write it down and go home to my chicken noodles. End of survey.

What’s my best estimate of the unemployment rate? One hundred percent, because everyone in my sample (one person) was unemployed.  Can I put any confidence in this conclusion? Of course not. I need to survey more people.

The same principles apply to The Times survey. Probably Iowans prefer DeSantis, although it’s a close call. But the fact that it is a close call does not mean that DeSantis is barely leading Scott. It just means that we can’t be too certain of our conclusion, whatever our conclusion happens to be. Here, our conclusion is that DeSantis is ahead by a country mile. Well, maybe a half-mile. –Leon Taylor, Baltimore, tayloralmaty@gmail.com

Reference

Jonathan Weisman. Trump leads G.O.P. in Iowa, but his hold is less dominant.  The New York Times. August 4, 2023. Trump’s Lead in Iowa Is Less Dominant, Poll Shows - The New York Times (nytimes.com)

Doing the Syrian stomp

 

                                          Za'atari refugee camp in Syria. Photo source: Saudi Gazette

The Syrian tragedy, ignored by the news media, deepens by the hour.

 

The government has almost doubled gasoline prices in a month. Auto insurance rates are rising as much as 50%, reports The Syrian Observer. This hits the pocketbooks of the most affluent and mobile, and thus politically influential, part of the population. Protests are likely. Sharp increases in food or fuel prices often trigger deadly riots, as they did in Kazakhstan in full view of my apartment window in January 2022.

 

Like other prices, those of gasoline are rising because the Syrian pound is going to zero. In one year, the dollar value of the official Syrian pound dropped 81%, from 2513 pounds to the dollar to 13,000 in three or four days.  If this trend continues, the exchange rate will rise to 1.9 million pounds per dollar in less than three weeks. That is, the pound will be worth 5/100,000 of a penny. Can you say "hyperinflation"? On the street, of course, the depreciation would be even steeper.

These numbers are conjectural, because the economy will implode long before the three weeks are up. The central bank of Syria might have been able to sustain such a large one-time devaluation, had it dollars in reserve to back the pound. But it doesn't. Indeed, the wasting away of the pound is largely due, I think, to the bank's incompetence. A year or so ago, one might have blamed the scarcity of dollars on US government sanctions meant to stop dollar laundering. But Washington has lifted the sanctions for a few months, and yet the pound is dwindling faster than ever. The likely suspect is the bank in Damascus.   

Most central banks, at least in the West, understand that they should tell it like it is, disclosing how much they hold in dollars and other foreign currency, known as “hard reserves.” This sustains public confidence in the long run. And it would behoove troubled central banks, too, if only to obtain emergency loans. But the central bank of Syria refuses to disclose anything.  So people assume the worst—they assume it has no dollars—and pull their own out of the country, fulfilling their prophecy. The Syrians seem to have learned banking from Zimbabwe.

For hard reserves, Syria turns to Iran.  Its other ally, Russia, is running out of dollars, too, thanks to Western sanctions against Putin’s War. Syria and Iran are jointly opening banks. Their growing political alliance will destabilize the Middle East.

Meanwhile, as its donations dwindle by two thirds over a year or two, the World Food Programme keeps cutting aid—by a third in two major refugee camps of Syria, Za'atari and Azraq, where the majority of the 119,000 survive, or did survive, on cash aid. 

 One can only predict hunger and conflict spreading to neighboring countries. Not for nothing has Turkey cut back the intake of Syrian immigrants by more than 214,000 in the past year, the equivalent of 1% of Syria’s population. The remaining destinations are Iraq, Jordan, the sea, and an early grave.

 Isn’t this the sort of situation that the United Nations was designed to resolve?  —Leon Taylor, Baltimore, tayloralmaty@gmail.com.

 For useful comments, I thank Annabel Benson, Randall Dittmer, and Mark Kennet.

Reference

The Syrian Observer. Newsletter. August 4, 2023. webmaster@syrianobserver.com via icontactmail3.com

The new Chinese syndrome

 

Producer price index in China. The roller coaster drops: Hang on to your stomach. Source: CEIC    China Producer Price Index | Economic Indicators | CEIC (ceicdata.com)                                            

Reports that prices will fall in China while rising elsewhere around the world bear a curious twist for Central Asia, where China is muscling out Russia as the dominant trade partner.

During the 2020 pandemic, China expanded production of exports to supply nations demanding home capital, like woks and exercise bikes, to survive the lockdowns that confined frustrated folks to the house. The pandemic is over, and China has more woks than it knows what to do with. So it will export at a cut price. 

Its Central Asian neighbors like Kazakhstan, Kyrgyzstan, and Tajikistan will substitute these cheap imports for their own expensive goods.  In addition, the Chinese themselves will buy more of their own goods rather than from other countries. 

Both effects raise demand for Chinese goods and lower demand for Central Asian goods. As a result, demand for the renminbi relative to Central Asian currencies will rise. The exchange rate of, say, Kazakhstan's tenge per renminbi will rise over the months to come, since people are willing to pay more tenge than before for a renminbi.

Although the tenge weakens, it is not accompanied by inflation this time.  People stop buying Kazakhstani goods, so their prices don't rise. The conventional wisdom in Kazakhstan that inflation and depreciation are inseparable is more convention than wisdom.

Interest rates will fall in Kazakhstan, because people sell tenge for renminbi. The increase in available tenge makes them easier to procure. The price of procuring a tenge is the interest rate, since you pay this to the bank to borrow it. To lend out the excess tenge, banks will lower their interest rates.

The ceteris paribus assumption applies with a vengeance. --Leon Taylor, Baltimore, tayloralmaty@gmail.com

Good reading 

Jason Douglas and Stella Yifan Xie. Wall Street Journal. While Everyone Else Fights Inflation, China Deflation Fears Deepen - WSJ . July 30, 2023.