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Gas prices are posted at the Citgo gas station The price of gasoline, which is made from crude oil, has soared as oil prices rise, and Karlsson argues that the Fed can't be entirely cleared of blame. (Alex Brandon/AP)
Jordan Weissman at The Atlantic denies that the Fed is responsible for the recent sharp increase in oil prices by asserting that the dollar has appreciated in value recently and is now stronger than before QE2 started.
His argument is wrong on many levels. First of all, I don't think anyone has claimed that the Fed is the only factor behind the recent increase. Inflationary policies by other central banks and of course the Iran issue have certainly also contributed to this, and that is not just my view but the view of most people who argue that the Fed is at least partly responsible.
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Secondly, while it is true that the dollar has recovered from the lows of the summer of 2011, his contention that the dollar is stronger than before QE2 started is flat out wrong. In late August 2010, just before QE2 was announced, the dollar index was trading at around 83, while it closed at 78.4 this Friday, 5.5% lower. Weismann deliberately misleads his readers by ending his chart of the dollar index at the January peak of 82, despite the fact that his article was published yesterday, when the index was more than 4% lower.
Thirdly, and more important, he ignores the point that the contention of Fed critics isn't necessarily that the dollar is weaker than in the past, but that it is weaker than it would have been without the Fed's actions. There have been other factors counteracting the effects of Fed actions, most importantly the European debt crisis that has greatly increased demand for dollar assets because they are seen (irrationally) as a safe haven. If not for the Fed, the dollar's rally between August 2011 and mid-January 2012 would have been even greater, and its declines before and after would have been much smaller or wouldn't have happened at all.
In the end though, Weissman actually concedes that the exchange rate mechanism isn't the only way that the Fed can raise oil prices. However, he gets the story largely wrong. The other mechanism is simply that by increasing nominal demand, prices go up. And because oil and other commodities have perfect price flexibility, being traded at financial markets they will respond quicker than the more sticky prices that exist.
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Republican presidential candidate, Rep. Ron Paul, R-Texas, gestures during a Republican presidential debate Wednesday, Feb. 22, 2012, in Mesa, Ariz. (Jae C. Hong/AP)
Ramesh Ponnuru, senior editor of National Review, has an article criticizing Ron Paul for his economic theories, which is to say he is criticizing Austrian economics.
I won't bother to refute all of his points especially since I've already refuted most of them when put forth by others, but I will mention his denial of the claim that the Fed's low interest policy have discouraged savings and encouraged borrowing.
"Consider, for example, a world in which the Federal Reserve conducts monetary policy so that the price level rises steadily at 2 percent a year. Savers, knowing this, will demand a higher interest rate to compensate them for the lost value of their money. If the Fed generates more inflation than they expected, as it did in the 1970s, then savers will suffer and borrowers benefit. If it undershoots expectations, as it has over the last few years, the reverse will happen. The anti-saver redistribution Paul decries is thus not a consequence of monetary expansion per se, but a consequence of an unpredictedly large expansion. For the same reason, monetary expansion does not necessarily lead to less saving. There is no reason to believe that the real burden of home loans would be any larger in a world with 2 percent inflation than in one with 1 percent inflation."
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This would be true if price inflation was entirely caused by factors unrelated to monetary policy actions. If that had been the case we would indeed expect periods of time with unexpectedly high price inflation due to for example crop failures to be compensated by periods of time with unexpectedly low price inflation due to unusually good crops.
But in reality, central banks create price inflation by lowering the real interest rate. They provide free money for the banks at levels below the natural level (time preferences of the population). This in turn enables the banks to lend more which in a fractional reserve banking system means a higher money supply which in turn creates price inflation. Lower real interest rates isn't just the result of higher price inflation, it is in fact the cause.
But what about his argument that savers will demand a higher interest rate? Well, rational savers will indeed do so, but even assuming that all savers are rational (and that's an implausible assumption), it won't matter, because the banks won't need the savers as the central bank can create all the money needed for the banks to lend. All savers can do is either save in foreign currency accounts (which will lower the dollar's value), buy stocks or fixed assets (like real estate or gold) or not save and consume.
Either way, savers behavior can't change the outcome when it comes to real interest rates, at least as long as the central bank is indifferent (or positive) to the inflaionary impact of their money printing. And it should be obvious that the Fed hasn't been significantly deterred from inflating by the effects on price inflation recently.
This point also affect another of Ponnuru's assertions, that Fed monetary policy hasn't enabled government expansion. Lower real interest rates will encourage not just private individuals, families and companies to borrow more, but also government borrowing. And with federal debt at more than $15.4 trillion, or about 100% of GDP (comparable to Portugal) government borrowing enabled by low interest rates have clearly played a role in expanding the size of government.
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Bobby Thompson, of St. Joseph, Mo., fills is gas tank at the Shop $ Hop at County Line Road and the Belt Highway Monday, Feb. 20, 2012 in St. Joseph, Mo. Oil prices in Europe have risen to near peak 2008 levels. (Todd Weddle/AP/St. Joseph News-Press)
Oil prices have recently risen, in part because of inflationary monetary policies and in part because the supply of oil from Iran is falling as the U.S. and the EU targets it with sanctions and as Iran has stopped deliveries to Europe even before the sanctions were formally implemented.
With the WTI oil price at around $105 per barrel still well below the July 2008 peak of $147 per barrel it would seem that things aren't that bad. However, that is misleading for two reasons. First of all, despite being misleadingly touted by the financial media as "the oil price", the WTI price has only a limited real world relevance and the more important Brent crude price is at $120 per barrel a lot closer to the 2008 peak.
Secondly, the dollar was much weaker in July 2008 than it is now. At that time, the dollar was trading at $1.60/â?¬, now it is trading at $1.32/â?¬. Thus, while oil is still cheaper to Americans than it was in July 2008, for Europeans it has returned to the roughly â?¬90 per barrel level that we last saw in July 2008.
That is of course going to put further pressure on European economies (except for Russia and Norway who benefits as exporters of oil), including the crisis hit ones in Southern Europe, while also illustrating the downside of a weak currency. A weak currency may raise nominal export earnings, but it will also make oil and other imports more expensive.
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The Millennium BCP flag and the Portugal's flag are seen at the bank headquarters in Lisbon. Along with Italy, Portugal has significantly reduced its deficit in 2011. The same cannot be said for Greece. (Hugo Correia/Reuters)
What the debt crisis is ultimately about is the fact that in certain Southern European countries people are spending too much compared to what they earn. With regard to this we are seeing significant progress in Portugal and Italy-but not in Greece.
In Portugal, the current account deficit in December fell from â?¬17.2 billion in 2010 to â?¬11.0 billion in 2011. That is still above 6% of GDP and thus still far too high, but as it is more than a third less than in the previous year (and nearly 50% lower than in 2008) that certainly represents significant progress. The December change was particularly impressive with the deficit dropping from â?¬2.1 billion to â?¬750 million.
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Italy saw its December 2010 deficit of â?¬4.9 billion turn into a â?¬400 million surplus. Though some of that reflected a likely temporary increase in current transfer receipts, most of it reflected a genuine reduction in overspending.
By contrast, there is almost no sign of progress in Greece, where the monthly current account deficit rose from â?¬1.85 billion in December 2010 to â?¬2.2 billion in December 2011. Perhaps some erratic one-time items distorted this number, but if you look at the figure for the year as a whole, it's only somewhat better, with the deficit only falling 8.3%, from â?¬23 billion to â?¬21.1 billion. With nominal GDP falling 6%, that's hardly any improvement at all.
The Greeks may be spending less, but they're earning less as well, keeping the relative overspending intact, as all too many of them (but not everyone, to be fair) are too busy striking, rioting and torching buildings instead of trying to do something useful as the people of the Baltic states did and as too a lesser extent the Portugese and Italians are doing now.
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In this file photo, job seekers lineup to attend a job fair held by JobEXPO, a company hosting hiring events, in New York. The education gap in unemployment in the US is shrinking, though still very high. (Bebeto Matthews/AP/File)
In March last year I discussed that the United States has an unusually large gap in rates of employment and unemployment based on the level of education. In most countries such data aren't available, but in two Asian countries where it is available, South Korea and Taiwan, there was virtually no difference at all, at least in unemployment.
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The U.S. gap remains very large, but it has actually dropped during the latest year. Between January 2011 and January 2012, the unemployment rate dropped by 1.2 percentage points for high school dropouts from 14.3% to 13.1%, 1 percentage point for people with only a high school diploma from 9.4% to 8.4%, 0.9 percentage points for people with "some college" from 8.1% to 7.2% while being unchanged at 4.2% for people with a bachelor's degree or more.
The trends in the participation rate (which mostly reflects trends in "hidden" unemployment) reinforces these trends, so the difference in the changes for employment rates is even bigger. The employment rate for high school dropouts rose by 1.1 percentage points from 38.6% to 39.7%, for people with only a high school diploma it was unchanged at 54.6%, for people with "some college" it fell from 64.5% to 64.2% while the employment rate for people with a bachelor's degree or more fell from 73.2% to 72.4%.
Given that the big gap was for reasons I explained in my original post mostly irrational, it is good that this convergence happens, at least to the extent that it reflects higher employment and lower unemployment among people with little education. While it is natural that people with a higher education should on average earn more, this should manifest itself in terms of higher wages or salaries for highly educated compared to persons with little education, not higher unemployment for people with little education.
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A Sweden national flag is waved during the gold Bandy World Championships game in Kazakhstan's commercial capital Almaty. Karlsson argues that the economic stagnation of Sweden is having a major impact on countries who rely on Sweden for exports, including Estonia. (Pavel Mekheyev/AP)
In the beginning of 2011, Estonia had the highest growth in Europe at 9.5%. This rate of yearly increase has now slowed down dramatically to 4% in the fourth quarter, with the quarterly change from the third quarter actually being negative.
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