The Oil Exchange Rate Paradox

Today it’s time for another paradox.

I will cal this one: the Oil Exchange Rate Paradox.

Everyone knows that the price of oil is priced in US dollars.

Another thing everybody (?) knows is that there is a negative correlation between the US dollar and the price of oil (although the usual explanation isn’t quiet right in my point of view, but that’s not for today).

Another fact is that the the majority of oil producers/exporters peg their exchange rate to the US dollar, like Saudi Arabia, Venezuela, Angola, Nigeria (not anymore) and many others…

So….my question is: When the price of oil falls  and the USD appreciates, every currency pegged to the USD will appreciate too (against other currencies).

However the drop in oil prices will reduce exports and therefore it decreases the oil exporter trade balance, leading to an increasing pressure for currency depreciation.

In conclusion, this oil producing country has an appreciating currency with imbalances that may lead do a depreciation. This is the Oil Exchange Rate Paradox.

Usually a country faced with this paradox will devalue its currency against the USD, will use its Foreign Reserves or will just control the withdrawl of capital.

I guess a simpler solution would be to just peg the currency to another one (a commodity currency, which depreciates when the price of oil falls, like the CAD, the AUD or the NOK) or simply just let it float.

This is a strange Paradox, because I’ve never heard of this before, so maybe I’m just plain wrong…

Well…maybe I’m not, who knows?


Kill your idols (part II)

Now it’s time for another “kill your idols” moment.

Steve Keen is one of my favorite economists. I learned a lot reading his book and his blog and I really enjoyed meeting him in Brussels.

However, recently in his blog he started bashing in Larry Summers (another economist which I admire and has been a truly influence on me).

Well, let’s see what is this all about. First of all, Steve Keen is the True Follower of Keynes (and Minsky) and all the other Post-Keynesians don’t even get endogenous money, (let alone the New Keynesians…)

So he says the main point nobody understands, is the effect of credit in overall demand. (OK he’s got a point but let´s return to that later). And he says Summers doesn’t understand that and that’s why he talks about the full employment natural interest rate, secular stagnation and all that schnitzel.

I don’t get why Keen has to bash on Summers, because the rise of credit is caused by the Secular Stagnation and the fall of the FENIR, so both theories could be seen as complements and not rivals. (at least in my point of view).

I still have some problems with Keen’s credit logic, (and he didn’t answer my questions) but I will leave that for another time.

What I really don’t get is why Steve Keen has to downgrade everyone as if he was the only true Messiah.

Brexit, Paul Krugman and prophecies

This post is not about Brexit.

Everybody has written about it and nobody really knows how it will end (or start..).

This post is about Paul Krugman. He is the most influential economist of our time. He was one of the reasons I became, first an economics geek and then a blogger. He is sometimes wrong (as everybody), but today he did something very peculiar.

Something he would usually point out about his “enemies”.

He denied his usual argument.

One of his major contributions to economics was the self-fulfilling currency crisis, which is a great idea and was recently applied to the Eurozone crisis (not a currency crisis but similar logic).

Today, talking about Brexit, he denied the logic made by some economists, that a recession may occur if a loss in confidence by investors happens.

Well, just like…a self-fulfilling prophecy!!

But what does Paul has to say?

“But in that case we’re saying that bad things will happen because firms will perceive an increased probability of bad things happening. That’s either circular reasoning, assuming one’s conclusion, or both.”

“Meanwhile, what about the argument that Brexit will worsen financial conditions, increasing risk spreads? Well, this seems to me to be another circular argument – it’s claiming that bad things will happen because investors will expect bad things to happen.”

So the prophecys only work when Paul wants it?