Given the choice, erring on the side of inflation would be less catastrophic than erring on the side of deflation.

TO BE NOTED: From the Economist:

"Deflation in America

The greater of two evils

May 7th 2009
From The Economist print edition

Inflation is bad, but deflation is worse

MERLE HAZARD, an unusually satirical country and western crooner, has captured monetary confusion better than anyone else. “Inflation or deflation,” he warbles, “tell me if you can: will we become Zimbabwe or will we be Japan?”

How do you guard against both the deflationary forces of America’s worst recession since the 1930s and the vigorous response of the Federal Reserve, which has in effect cut interest rates to zero and rapidly expanded its balance-sheet? On May 4th Paul Krugman, a Nobel laureate in economics, gave warning that Japan-style deflation loomed, even as Allan Meltzer, an eminent Fed historian, foresaw a repeat of 1970s inflation—both on the same page of the New York Times.

There is something to both fears. But inflation is distant and containable, while deflation is at hand and pernicious.

Dragged down by debt

Fears about deflation do not rest on the 0.4% decline in American consumer prices in the year to March. Although this is the first such annual decline since 1955, it is the transitory result of a plunge in energy prices. Excluding food and energy, core inflation is 1.8%. Rather, the worry is of persistent price declines that characterise true deflation. With unemployment nearing 9%, economic output is further below the economy’s potential than at any time since 1982. This gap is likely to widen. House prices are not part of America’s inflation index but their decline is forcing households to reduce debt (see article), which could subdue economic growth for years. As workers compete for scarce jobs and firms underbid each other for sales, wages and prices will come under pressure.

So far, expectations of inflation remain stable: that sentiment is itself a welcome bulwark against deflation. But pay freezes and wage cuts may soon change people’s minds. In one poll, more than a third of respondents said they or someone in their household had suffered a cut in pay or hours. The employment-cost index rose by just 2.1% in the year to the first quarter, the least since records began in 1982. In 2003, during the last deflation scare, total pay grew by almost 4%.

Does this matter? If prices are falling because of advancing productivity, as at the end of the 19th century, it is a sign of progress, not economic collapse. Today, though, deflation is more likely to resemble the malign 1930s sort than that earlier benign variety, because demand is weak and households and firms are burdened by debt. In deflation the nominal value of debts remains fixed even as nominal wages, prices and profits fall. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. That undermines the financial system and deepens the recession.

From 1929 to 1933 prices fell by 27%. This time central banks are on the case. In America, Britain, Japan and Switzerland they have pushed short-term interest rates to, or close to, zero and vastly expanded their balance-sheets by buying debt. It helps, too, that the world has abandoned the monetary straitjacket of the gold standard it wore in the 1930s.

Yet this anti-deflationary zeal is precisely what alarms people like Mr Meltzer. He worries that the price of seeing off deflation is that the Fed will be unable or unwilling to reverse itself in time to prevent a resurgence of inflation.

Fair enough, but inflation is easier to put right than deflation. A central bank can raise interest rates as high as it wants to suppress inflation, but it cannot cut nominal rates below zero. Deflation robs a central bank of its ability to stimulate spending using negative real interest rates. In the worst case, rising debts and defaults depress growth, poisoning the economy by deepening deflation and pressing real interest rates higher. Central banks that have lowered rates to nearly zero are now using unconventional, quantitative tools, but their efficacy is unproven. Given the choice, erring on the side of inflation would be less catastrophic than erring on the side of deflation.

That said, there is a legitimate concern that when the time comes to raise interest rates, the Fed may hold back because of political pressure or fear of fracturing financial markets. The Fed was too slow to raise interest rates after its deflation scare in 2003. Yet that is best addressed by strengthening the Fed. Barack Obama should nominate credible, independent people to the two vacant seats on the Federal Reserve Board, and bat away suggestions that the 12 reserve-bank presidents, who are not confirmed by Congress, lose their say in monetary policy. Congress should let the Fed issue its own debt, which would give it scope to tighten monetary policy without disorderly sales of the illiquid private debt it has taken on.

Affirming the Fed’s political independence and equipping it with better tools would help the central bank combat inflation when the time comes. It would also lessen the risk that it tightens prematurely just to demonstrate its resolve."

Worries about Rwanda’s record on human and political rights are now compounded by worries about its economic record.

TO BE NOTED: From the Economist:

"The genocide in Rwanda

The difficulty of trying to stop it happening ever again

Apr 8th 2009 | KIGALI
From The Economist print edition

Fifteen years on, the country is praised for salving the wounds of genocide. Yet that comes at the price of diminishing freedom. And now the economy is faltering

AP

EVEN today, it is almost impossible to imagine how so many Rwandans could have turned into coldblooded butchers. The memorials to the slain that now grace many of the towns and villages in the country provide only small glimpses into the collective insanity that gripped a whole country in April 1994, when the Hutu killers turned on their Tutsi fellow citizens and Hutu sympathisers, leaving over 800,000 dead in three months.

Take the memorial at the National University of Rwanda in Butare, a couple of hours’ drive south-west of the capital, Kigali. Under a corrugated iron roof a long board displays the photographs of about 60 students who were killed. In fact, most of the staff and students at the university, over 500 in all, were slaughtered in just two weeks or so; only a few escaped across the nearby borders to Congo or Burundi. Many of the students were killed by their own teachers, specifically the dean of agriculture and vice-dean of political science. The former not only personally killed students but organised the campus massacre as well. What could have been running through their minds in the weeks leading up to the killings, as these highly educated people calculated how best they could hack or shoot their own students to death?

These awful questions haunt Rwanda to this day. It is only a mixed comfort to the genocide’s few survivors at the university that those two former academics responsible for many of their friends’ deaths are still in prison, just down the road. Some think they should have had a worse fate. But one of Rwanda’s main problems, in terms of justice and retribution, has been that so many Hutus, hundreds of thousands of them, became génocidaires; it was always going to be impossible to impose the harshest sentences on all of them. Only the ringleaders have been tried by an international court sitting in neighbouring Tanzania. Thousands of others in Rwanda have been sentenced to prison by local traditional courts known as gacaga. Gangs of them can be seen in their distinctive overalls, doing hard labour, digging irrigation ditches and so on, all over Rwanda.

They are a constant visual reminder of the crimes of 15 years ago. Indeed, in some ways Rwanda is facing as difficult a struggle today with the legacy of the genocide as at any time since 1994. For it is only now that thousands of former génocidaires who have been fighting for many years from bases in the jungles of eastern Congo against the current Tutsi-dominated government are at last returning to Rwanda.

That they are returning at all is a victory for the long-term strategy of President Paul Kagame’s government to bring back the country’s previously hostile Hutus from the near abroad. Most of them were put to flight by Mr Kagame’s own then-rebel army, the Rwandan Patriotic Front (RPF), that forced an end to the genocide in 1994. They are being re-educated in special camps in the hope that they can be peacefully reintegrated into Rwandan society.

But even if the policy works, it will come at a high price for the Tutsi survivors of the genocide. Freddy Mutanguha, who manages the Kigali Genocide Memorial Centre, is used to dealing with the genocide’s consequences. Yet even he found it “too difficult” when two of the returning génocidaires moved into his home village of Kibuye a couple of months ago after they came back from Congo. So now his neighbours are two known killers “being fed and protected by the Rwandan government”. Mr Mutanguha, understandably, did not want to return to his own home to see them.

Courage and even generosity of spirit in dealing with an awful situation has earned Mr Kagame’s government high marks in the West and in Africa as a whole. After all, Rwanda is the only genocide case where the victims, the Tutsi, have chosen to reintegrate their killers into the country and to live as neighbours again—a uniquely hard task, especially in Africa’s most densely populated country. In other genocide cases, the victims have left altogether, sometimes to help found a new state of their own, such as Israel, or have been marginalised in their own country, as were the Herero in South-West Africa, now Namibia. To encourage reconciliation, Rwanda has embarked on an experiment to change completely the way a new generation thinks about itself. Now, officially, no one is a Hutu or Tutsi; there are only Rwandans. Ethnicity, the genocide’s alleged cause, is being outlawed.

The use and abuse of anti-genocide law

For sure, the government’s policy has contributed to a new era of peace; Rwanda, it is generally agreed, is now one of Africa’s most law-abiding countries. Yet the reach and ferocity of new laws encouraging reconciliation are making Western donors and many Rwandans queasy. Is the country paying too high a price for its policy?

Critics fear that any challenge to an already authoritarian government is gradually being outlawed under a pretext of criminalising the promotion of so-called “genocide ideology”. There were already stiff penalties for “divisionism”, an acknowledgment of differences between Hutu and Tutsi. But last year a new and even fiercer law was passed, carrying heavy penalties. Its criminalisation of genocide ideology is so broadly drawn that it could be used to prosecute people for any number of utterances.

Clause three, for instance, states that the crime of promoting genocide ideology is characterised by “dehumanising a person or group with the same characteristics”, and that this can be done by “marginalising, laughing at one’s misfortune, defaming, mocking, boasting, despising, degrading, creating confusion aimed at negating the genocide which occurred, stirring up ill feelings”.

About 1,300 cases involving genocide ideology were initiated in Rwanda’s courts in the 2007-08 judicial year, even before the latest law was passed. Human-rights critics say these ill-defined laws are being abused by the government, enabling it to prosecute anyone, including young children, who say anything the government dislikes or who draw attention to the role of Mr Kagame’s own RPF in the massacres of 1994. For many, justice has been too partial in post-genocide Rwanda; many of Mr Kagame’s men, estimated by the UN to have killed up to 45,000 people between April and August 1994, have got off lightly.

These draconian laws chime with the government’s general dislike of dissent. Some foreign critics are now banned from entering the country, however sympathetic they may have been to Rwanda in the past. Alison des Forges was probably the greatest foreign expert on Rwanda until her death in a plane crash in February. She had been the most sensitive and thorough chronicler of the genocide but, as an increasingly vocal critic of Mr Kagame’s human-rights record, she was banned last year, her death barely marked in Kigali. Open political opposition is declining. At elections the formal opposition parties largely mimic the government line and then join the government afterwards. There is little real choice.

Worries about Rwanda’s record on human and political rights are now compounded by worries about its economic record. Indeed, they are related. The economic recovery after the genocide, when Hutu militias looted the country before fleeing into Congo, had been remarkable, if largely funded by the diaspora and by foreign aid. But in the past few years it has stalled. The number of Rwandans living in extreme poverty is reckoned to have declined from over 75% in 1994 to 57% in 2006. But the figure has barely moved since then. Because of a rapid increase in population, the absolute number of people in poverty has probably risen.

Rwanda now needs a vigorous private sector to keep the economy moving in the right direction, especially if the country is to meet its lofty goal of becoming east Africa’s service hub. The government talks up its eagerness for free enterprise, endearing it to the West, but entrepreneurs, especially from abroad, often feel hamstrung in what they are allowed to do—and so leave. A controlling government will hurt Rwanda’s economic prospects as well as its wider freedoms; the two are indivisible."

The UN’s human rights chief, Navi Pillay, has suggested that both may be guilty of war crimes.

TO BE NOTED: From the Economist:

"Sri Lanka's war

Killing civilians

Apr 9th 2009 | COLOMBO
From Economist.com

A doctor describes a slaughter in Sri Lanka

AFP/AP

Get article background

OVER 60 refugees are reported to have been killed by shellfire in north-eastern Sri Lankan on Wednesday April 8th. They were among thousands trapped by fighting between the army and surviving Tamil Tiger rebels, who are making a last stand on Mullaitivu beach, a sandy-spit between the Indian Ocean and a long lagoon.

The beach, which is roughly 17km in length and 1.5km wide, has been designated as a “no-fire zone” by the army, which claims to have surrounded it. Yet the civilians encamped there—perhaps 150,000 in all, according to the International Committee of the Red Cross (ICRC)—have been regularly bombarded, for which each side blames the other. The UN’s human rights chief, Navi Pillay, has suggested that both may be guilty of war crimes.

The army says it has engaged in almost no fighting since April 5th, when it emerged victorious from a three-day battle outside the no-fire zone, where it killed 525 Tigers. An army spokesman says it has not used indirect fire in the region—including artillery and mortar rounds—for several weeks. According to a doctor working in a makeshift hospital in the no-fire zone, however, it saw unprecedentedly heavy shellfire and civilian casualties on Wednesday.

By phone from the war-zone, he said that 296 wounded refugees had been brought to the hospital, a converted school building, and that 47 had died there. Typically with “big lacerations in the abdomen, in the chest, very bad head injuries”, the wounded included 52 children under the age of 15. The doctor, who requested that his name not be published, said that the hospital, which has eight doctors and 20 nurses employed by the government to work in the Tigers’ formerly extensive fief, had been overwhelmed by this influx. Already, he said, a dire shortage of drugs had driven them to carry out surgery on people dosed with painkillers, but not anaesthetic. Over 100 of the newly wounded were therefore evacuated (along with 400 others) aboard small fishing boats to a ship manned offshore by the ICRC. The doctor said he had heard that at least three of these evacuees subsequently died.

Shortly after 7am, the doctor said he had seen the effect of the first bombardment of the day. He said five shells had landed, a few minutes and up to 30m apart, in an area thick with refugees: three of their jerry-built shelters, constructed of sticks and plastic sheeting, took direct hits. The doctor said 13 people, including a mother of four children and at least one child, were killed by the volley, and 55 were seriously wounded.

“It’s a very fearful situation,” he said. “Everywhere you look, people are dying, like hunted animals.” Because the government has barred journalists and most aid workers from the battlefield, it was not possible to verify his report. But the figures it contains are consistent with those quoted to the BBC by another doctor at the hospital, and with reports sent, from various sources, to foreign diplomats in Colombo. The ICRC has said that one of its workers was killed in the no-fire zone by shellfire on Wednesday.

The doctor said that in March nearly 2,800 wounded refugees were admitted to the hospital, of whom over 500 had died there. Many others, he said, had been killed and buried without reaching the hospital. These figures are broadly consistent with other estimates. Of 2,400 sick and wounded evacuated from Mullaitivu beach from January to mid-March, 1,900 underwent surgery for shrapnel and splinter wounds.

Though the government denies shelling the no-fire zone, it has admitted doing so to foreign diplomats, to return the Tigers’ fire, and only where it could ensure no civilian would be harmed. Given that artillery fire is said to be accurate with a 250m-margin for error, this may explain some of the casualties. But the government suggests it is the Tigers who are firing on the refugees, who they are certainly holding hostage, in an effort to smear the army and provoke international outrage and a ceasefire. For their part, the Tigers, who the army says are down to 200 hardened fighters, accuse it of killing the refugees.

According to the doctor on Mullativu beach, each bombardment provokes a clamour of refugees wanting to escape. Over 20,000 have done so in the past three weeks. But the doctor said that many are being deterred from trying because of the dangers of crossing a battle-field-and because of the “local police”, a possible euphemism for the Tigers. Contrary to official reports, the doctor said that sporadic fighting appeared to be continuing outside the no-fire zone."

The value of an SDR is defined as the value of a fixed amount of yen, dollars, pounds and euros, expressed in dollars at the current exchange rate

TO BE NOTED: From the Economist:

"Special Drawing Rights

Held in reserve

Apr 8th 2009
From The Economist print edition

A brief guide to the IMF’s “currency”

SPECIAL Drawing Rights, or SDRs, are often referred to as the IMF’s currency. Although that is useful shorthand, the SDR is not, in fact, a currency, but rather the IMF’s unit of account. The value of an SDR is defined as the value of a fixed amount of yen, dollars, pounds and euros, expressed in dollars at the current exchange rate. The composition of the basket is altered every five years to reflect changes in the importance of different currencies in the world’s trading system.

SDRs nevertheless represent a potential claim on other countries’ freely usable currency reserves, for which they can be exchanged voluntarily. Alternatively, countries with strong external finances can buy SDRs from countries which need hard currency. On April 2nd the G20 countries authorised the IMF to issue $250 billion in new SDRs. The advantage of a fresh SDR issuance is that it immediately augments countries’ foreign reserves without needing to be lent.

However, this benefit comes with a serious drawback. Although the G20 portrayed the new SDRs as a quick way of channelling resources into emerging economies, SDRs are in fact allocated in proportion to countries’ existing IMF quotas (see table).

This means that around $170 billion of the $250 billion of new SDRs that are to be issued will land in the reserves of rich countries, because they have the lion’s share of existing IMF quotas. Still, the increases in the reserves of some emerging economies are not trivial. South Korea’s will grow by $3.4 billion, India’s by $4.8 billion, Brazil’s by $3.5 billion and Russia’s by $6.9 billion. Another sign of the instrument’s bluntness can be seen from the fact that China’s vast reserves, already nearly $2 trillion, will go up by $9.3 billion.

Of course, the IMF hopes that some rich countries (or reserve-rich emerging ones) will lend their share of the new SDR allocation to those in greater need. But this is by no means guaranteed. America, for example, needs Congress’s approval to part with its share. The last proposed SDR allocation, of $21.4 billion, was approved by the IMF’s board in 1997. But although 131 countries with 78% of the total votes in the IMF accepted the proposal, it was never put into effect. Such decisions require 85% support—and America, with nearly 17% of the votes in the IMF, never approved it.

"This is both clever and facile, in a very Economisty way: it's the sort of thing which reeks of Oxford Union debates."

I decided to give The Economist some free advertising advice. From Free Exchange:

"In May of 2003:

Yet even as house prices start to wobble, many housing experts continue to insist that "this time is different": because interest rates will not rise significantly in the near future, they say, a slump in house prices is unlikely. This survey has argued that even if interest rates stay low, house prices could tumble, undermined by dwindling demand from first-time buyers and waning confidence. However, the experts are right to say that this housing boom is different from previous ones, in two worrying ways. First, inflation today is close to its lowest for half a century. This means that overvalued house prices cannot regain their long-term equilibrium mainly through inflation, as they have done in the past. Instead, house prices will have to fall by at least 20% in money terms in most of the countries with bubbles.

A second important difference is that this time the surge in house prices has gone hand in hand with a proportionately larger jump in household debt. Not only are new home-buyers taking out large mortgages as a percentage of the purchase price, but existing owners have taken advantage of rising house prices to increase their mortgages and turn some of their capital gains into spending money. In America, Britain, and Australia mortgage-equity withdrawal is running at record levels of 5-7% of personal disposable income.

A bubble can never be positively identified until after it has burst, but the rapid increases in both house prices and mortgage debt should set alarm bells ringing. Either way, consumers are living on borrowed time. Even if house prices simply flatten off, the scope for mortgage-equity withdrawal and hence consumer spending will slow sharply. If, as seems more likely, house prices fall, the recent borrowing binge means that more people than ever before will find their homes are worth less than their mortgages.

And in June of 2004:

Housing optimists dismiss these fears by pointing out that doomsters such as The Economist began wringing their hands about a property bubble a year ago, and yet prices have continued to climb. But this has made the housing market not safer, but more vulnerable. The first law of bubbles is that they inflate for a lot longer than anybody expects. The second law is that they eventually burst.

You get the idea."

Here's my comment:

Don the libertarian Democrat wrote:

I'd take this post down, friend. It means no one listens to you. That's hardly what you want on your masthead, is it?

The Economist: Read The Analysis Everyone Ignores

12/1/2008 6:57 PM GST