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John Quiggin 
The Axis of Evil or the enemy within?
http://www.news.com.au/story/0,10117,18767585-401,00.html
Was this the second best Option B logical default plan if the COW failed with the Plan A, BOL in Iraq?
The speculation that the US will use nuclear weapons against Iran, is just speculation. It’s just one of a number of options; a contingency if you will.
The ‘real’ bomb may well be the ‘debt bomb’ that we’ve alluded to our on blog.
Iran is stacking up a lot of foreign debt. You add possible and likely economic sanctions, plus a drying up of FDI, the Iranians will have a big problem, which may avoid the need for any military action at all.
What will be the price of a barrel of oil if the UN imposes sanctions on Iran? The “option” of a preemptive nuclear strike is madness.
week by week, what rubbish are you spouting about nukes to be used on Saddam? As a close follower of the arguments three and more years ago, that wasn’t raised as a concern by anyone credible, ever.
And total debt for the country of $24.5 billion (USD I presume) doesn’t sound like very much at all to me. Maybe I’m inured to hearing the Australian, US and European debts, all far larger. Can someone do a debt to GDP ratio for Iran v the USA? I suspect the US would look ratshit.
Wilful, the 24.5 billion doesn’t sound high, less than 5% of GDP. I think the main concern is the impact of higher debt should any economic sanctions be imposed. Secondly, with an annual inflation rate persistently above 15% things could turn poorly for them rather quickly.
As we contemplate an invasion of Iran, one could do well to ponder the effects of an earlier, disastrous, intervention:
wilful – “week by week, what rubbish are you spouting about nukes to be used on Saddam?”
I think the reference is to this speculation that the US want to make sure the deep underground centrifuge is taken out. A lot of it was started from an article in the New Yorker by Seymour Hersh.
http://seattletimes.nwsource.com/html/nationworld/2002920093_iran09.html
They only have to close the straights of Hormuz to stop most of the world’s oil – lets see who goes down first the US or Iran.
http://www.timesonline.co.uk/article/0,,2089-2125155,00.html
Steve, I don’t think invasion and a BOL are on our agenda for any Islamic country now, let alone the Martyrdom Garrison of Iran. Iraq is slowly but surely showing the West what it wanted to know about Islam. What was your point about Kosovo exactly? More of the same?
All this heavy duty Iran and nukes stuff makes my question look rather naff…but I’ll ask anyway.
In a market economy, shortages of things, without changes in demand, lead to increased prices. This is apparently okay – it’s how it’s supposed to work. Well then, why is that when labour gets to be in short supply, and there’s indication that wages might rise to reflect that shortage, it’s presented as a catastrophe in waiting, rather than an acceptable market response?
What’s so special about labour supply, compared to banana supply?
I’m not an economist, so I hope your responses (if any) can be intelligible to mere mortals.
“What’s so special about labour supply, compared to banana supply?”
None whatsover unless you’re a lefty populist politician spog. Actually these days you don’t even need to be lefty, just populist.
Wilful, I was just repeating the speculation published by conspiracy theorist Seymour Hersh, see: http://weekbyweek7.blogspot.com/2006/04/iran-forget-nukes-debt-bomb-should-do.html#links
We did say on our blog: “The tactic is only a contingency, which amongst others should be actively considered. However, consideration doesn’t mean that nukes will be used.”
We then on to make the argument about using the Iranian foreign debt as an effective tool.
Wilful, what point are you making about the GDP comparison?
In relative terms, it would seem pretty self evident that the Iranian’s debt servicing committments (as largely a 3rd world nation) would be significantly harder to realise, than the US. Or perhaps that isn’t so obviously self evident to you?
My point about Kosovo is that it has become an unmitigated disaster. As did Iraq. As will Iran. Yet for some reason there are people who think we shall be somehow immune from any significant consequences stemming from a nuclear attack on Iran.
Not sure about the Iranian ‘debt bomb’. They’re running a trade surplus and they’ve got annual exports more than two times net external liabilities (and the oil price isn’t exactly moving against them). That compares to a massive trade deficit (7% of GDP) and annual exports less than a third of net liabilities in the US. The vastly differing required rates of return certainly factor, but enough to imply the US will win this staring contest on that basis? I think not.
Speaking of, if the US were to attack Iran, the oil price would go well into the triple digits (USD). Capacity is too tight for Iran’s current production to be met elsewhere- the price mechanism would need to strongly disincentivize demand. In the current climate, that sort of supply shock could quite easily trigger financial pandemonium (as any substantial loss in the market’s unprecedented appetite for risk will cause substantial deleveraging). On the other hand, taking stock of the employment data from Japan and the travails of the kiwi (and to a lesser extent aussie) dollar, it looks increasingly likely we will get there independently.
Spog,
People get all in a twist about labor costs, (and more directly, unit labor costs which differ in that they control for the productivity of labor hours paid for), because they portend the direction of short-term interest rates. This is because, apart from a select few industries, unit labor costs are by far and away the most significant cost of production. This means that to the extent unit labor costs increase, they do not so much indicate as result from inflation (i.e. a rising aggregate price level). The rationale for the ado about unemployment data is related. The theory goes that there is a natural rate of unemployment arising from economic dynamics, (e.g. certain economic activity displaced by other, etc.), and from other factors that contribute to ‘stickiness’ in the labor market, (regulation, geographical disequilibrium, transaction costs). When this sustainable level of unemployment is reached- what economists call “full employment”- it cannot go lower without generating higher unit labor costs/inflation.
That said, don’t ask me how the world’s central bankers got it in their heads that changes in the price of a narrow basket of finished goods are the be all and end all of monetary policy. This I do not have an answer for.
majorajam said: “They’re running a trade surplus and they’ve got annual exports more than two times net external liabilities (and the oil price isn’t exactly moving against them).”
That ties into our point, economic sanctions will particularly place significant constraints (cashflow and supply chain etc) on thier production capacities as well as ‘scaring off’ potential and current investors!
No doubt Week by Week, but even were economic sanctions not a pipe dream, as assuredly they are, they would reek as much havoc on the global economy as on Iran’s. There is little to no slack in global oil supply at the moment and for the foreseeable future due to production lead times and the naturally declining yield of current production. At around 2.5mm bpd, Iran is the world’s fourth largest exporter of oil. The effect of shutting them down would be the fruition of what one research team at Goldman termed a “super spike” in price. It would be devastating to the financial markets and, as likely amplified through the financial markets, to the global economy (as mentioned).
All in, economic sanctions would be tantamount to suicide bombing at best. Good thing we’d never be able to get them through the security council (unless the alternative is military action, that is).
An interesting article on peak oil at http://www.energybulletin.net/14695.html “A Critical Look at Peak Oil Catastrophism” that complements JQ’s recent article.
What’s so special about labour supply, compared to banana supply?
Bananas don’t vote. Bananas don’t consume. Bananas don’t transform goods, add value or provide services. Bananas don’t constitute society or the economy. Bananas aren’t people. Some people apparently believe people who have to sell their labour to survive aren’t people either, and should be treated just like bananas.
Hmm. I don’t want people to misconstrue my question, so I’ll put it another way. After cyclone Larry, it was widely predicted that the price of bananas would rise, reflecting their scarcity. This was also meant to be an example of how the market works. On the same page as I was reading that, was a comment about how a shortage of labour could result in increased wages. However, instead of this being a normal response of the labour market, it seemed to be described as an awful thing, and something the Reserve would have to crush via interest rate rises.
I was merely puzzled by the wildly disparate response to two shortages, hence my question.
Hersh does have an eye for conspiracies that come true. Abu Ghraib rather leaps to mind. Along with a certain scepticism about WMD.
Note that Hersh is tracking the currents of thought through the administration – he is reporting plans, not outcomes.
If Kissinger was in control, we could say pretty safely that the administration wants to seem crazy because all the logic points to them leaving Iran alone. They are having enough trouble in Iraq blah blah. But at the very least, the US must want the Iranians to think that they could be made to suffer for interfering in Iraqi politics.
So it is logical, from that point of view, to put the Iranians under whatever pressure you can from the international community, and nukes is the agenda to do it. It is also logical to make them think that the US might try and pink mist the Iranian infrastructure.
However, the current generation of US leaders doesn’t seem to function like that. They make a decision to attack, present it as a diplomatic game, but play it so there is no possible way the target country can win. It’s not that war is a fake to make diplomacy work; diplomacy is the fake to justify the war.
Spog, it’s a good question, and I wish someone here would answer it.
Spog,
I was wondering the same thing when I heard the complaint that roffers were cahrging $150 an hour to fix rooves messed up by Cyclone Larry which was described as profiteering rather than as a logical market response. Whilst I would not be happy to pay those rates I can see that it is a market response to shortage of labour and huge amounts of work.
What I failed to understand is observa’s response which clarified nothing but attacked a non existent enemy. The attack the messenger approach is not very enlightening.
When looking at the NoWokChoice legislation what becomes clear is that the labor market has been distorted by the prevention of labor organising into units which benefit labour to benefit the minority employer class. It is a gamble whether people can be convinced to accept an inferior status in the market place when the price of the labour can be artificially lowered through legislation.
Even those who have AWAs in the past have used the Enterprise Bargains as a benchmark in the marketplace. In making future Agreements secret the market is impeded in setting a comparable value on a worker’s time as the employers together can set lower rates. Why the labour market is different
– has more to do with the need for those who claw their way to the top to have a need to feel superior to those below them on the food chain.
Spog,
I’ll try this again, even though my first response seems to have gone unnoticed.
Labor costs are the most prominent cost of doing business (by some margin). So, based on a “cost push” theory of inflation, an instance like cyclone Larry is likely to generate inflation (as the increased labor costs- especially cost per unit of output, rather than per hour, i.e. unit labor costs- cause producers and retailers to raise the prices of their wares). Hence, the central bank should have to restrict the economy via higher short term interest rates to counteract it.
Boilerplate horse hockey. “Cost push” is not a sound theory of inflation- it is misleading. Increasing labor costs actually do not drive inflation, but are rather symptomatic. As with any symptom- even one as generally reliable as unit labor costs- there can be more than one diagnosis, e.g. a runny nose doesn’t always result from a cold.
In this case, the increased cost of labor would have a ‘real’, i.e. non-monetary, driver: a supply shock. The only mechanism by which those costs could flow through to medium to longer term inflation is if the short-term impact of the higher labor costs on the aggregate price level influenced general inflation expectations. This is highly unlikely.
What’s more, the impact on the economy of the supply shock to labor could very well be to disincentivize lending/borrowing activity by more than would be appropriate by the decrease in economic activity, which is actually disinflationary (and implies that easing monetary policy could be a better response than tightening it). This is where things get a bit more interesting: where cyclone Larry could contribute to medium or longer term inflation is if the fiscal and monetary authorities react to the strain on the economy with expansionary policy (as they did with the oil supply shocks of the 70s).
My previous post gives a substandard explanation of why labor costs are relied upon to signal the central bank about the inflationary impact of their policy. Hopefully together, you have an answer to your question.
Here you have some other interesting global and regional trends that can teach us much if we only stop believing all the spin, stop planning our next war invasion plans, war profiteering and actually think and wake up a bit: check the WSF and what’s been going on in Latin America, for example.
Like the Herd has said many times:
In a time of universal deceit, telling the truth is a revolutionary act. — George Orwell
Jill Rush – do I get a choice if I’ve got a Wok? I’ve got a good one!
spog,
The RBA is not going to move on a highly localised change in wages and I doubt that bananas form enough of our GDP to make anything more than a movement down in the noise level of CPI.
In an open economy, if there is a change in wage rates there is less chance that this will result in a CPI increase anyway – as import and export prices are likely to remain stable all that happens is the return to the other factors of production will vary to compensate in the medium term. In the long term anything could happen.
.
Jill,
What happens when an employee resigns from their job to go and start their own business – do they also move out of the all just and good majority working class and become part of the evil, exploitative and minority employer class?
How does that change your place in the food chain?
Thanks to Majorajam and Andrew Reynolds for trying to get my rusting brain to understand this. If I read the replies a few more times, I might know if they have succeeded!
This is probably a really, really stupid question, but is inflation a purely monetary based thing? Can you have inflation in an entirely barter based economy?
Spog,
Inflation is a change in value of one good in relation to another. If you are paying in potatos for rice and one day you pay 3 potatos for a basket of rice and the next you have to pay 4 potatos for the same basket you have inflation from the potato side and deflation from the rice side.
Essentially, in talking about inflation, you are implicitly assuming that the value of money is fixed and other prices vary. Money is then the price that everything else is judged against. In a barter economy, there is no such reference point, so no true inflation.
Can you have an entirely barter based economy? The use of a single commodity or market good as a universal yard stick for value is so compelling that money emerges spontaneously from almost every barter economy that has ever existed.
Inflation is a decline in the value of money. The decline has only two possible sources.
1. The demand for money has fallen.
2. The supply of money has increased.
The demand will generally only fall if there are substitutes that become popular (eg credit based transactions) or if the size of the transaction domain has shrunk (eg recession).
In a modern fiat monetary system the monetary authority has complete control over supply and almost no control over demand. However any change in demand can be compensated for with a change in supply. So in theory at least inflation is entirely under the control of the monetary authority so long as it has the insight and the will to act.
Terje
You appear to be applying your idiosyncratic definition of money as currency again.
But if you want to argue that increases in the supply of money cause inflation, it makes no sense to restrict the definition to currency.
In any case, whether we adopt your definition or stick to the standard definition (currency in the hands of the public plus deposits) it is simply not true that the central bank has complete control over the supply. I wonder where you got this idea. Not from any introductory textbook on monetray economics, that’s for sure.
You can’t in fact easily separate supply and demand. If the interest rate falls or there is a surge in business confidence, people borrow more and the aggregate of bank deposits increases. Of course there are supply constraints: banks won’t lend to just anybody; they need to earn a margin enough to cover their costs; they may be exercising monopoly power; and they have an eye to their reserve ratios. But these constraints are not always binding, and when they are not, demand essentially determines supply.
“it is simply not true that the central bank has complete control over the supply”
James, I may be missing something here but my understanding is that the interest rate set by the central bank is only a target. In order to achieve this target the central bank must use it’s open market operations in order to either drain or inject liquidity. Considering the assets available to the Federal reserve I would have thought they have immense control over the money supply.
Crocodile
OMOs are a device to control the very short-term ‘official’ rates, which is achieved quite precisely. These rates feed through to longer term rates with less precision. What the CBs are controlling is the money base, which in turn affects the interest rates, which in turn affects the money supply. But it is the interest rates rather than the money supply which is the intermediate target, the final target being the price level itself, of course.
It’s worth reading the official explanations of how it works in the US, Britain, Australia and Europe.
Spog,
Actually, this is an excellent question. In most contexts, inflation is a purely monetary phenomena, for which there is no scope in a barter economy. However, when we consider what is meant by inflation- i.e. the rise in the price of a basket of goods in terms of some store of value (production or money)- this is not limited to a monetary framework. If I have stored all my wealth in textiles or in gold or what have you, and a major gold deposit is discovered, or a new technology capable of making the same textiles at a fraction of the cost is discovered, then the amount of that basket of goods I can buy with my other goods declines. Such a change in relative prices fits with most people’s working definition of inflation and, in this case, is wholly non-monetary.
Further complicating matters, credit can exist without money. I can buy things with claims on goods, that are themselves denominated in those goods. If I have a herd of cattle, I can get things in exchange for claims on those cattle. Pieces of paper. This type of activity can affect the market price of cattle in terms of other things without affecting the intrinsic exchange value of the cattle, i.e. the demand for and supply of them (and more so to the extent claims on cattle are substitutes for cattle). Of course, if I print too many of these claims, it will eventually trigger a run on my herd of cattle.
All of these examples are highly instructive, especially in the current environment.
And to think that all these problems in the Middle East (and mostly the rest of the world) are due to a dispute between Arab subtribes.
And hasn’t it always been?
IE, a shepherd from the hills of Ur is placed in charge of the agriculture dept of Egypt.
The shepherd is quite a good farmer and has granaries built to store grain while the pharoah is interested in building monuments.
So, when the drought arrives and the farmers come to the northern farmer now in charge of the affairs of the farms and ask for drought assistance, the man whom we shall call Joeseph willingly hands out grain in return for 10 shekels plus 1 shekel as interest.
The farmer complains that he has no shekels as no shekels are in circulation. So Joeseph takes cattle instead of money.
Soon the farmer is trading more cattle to feed remaining stock until the drought is so long that this farmer is bankrupt, at which time Joeseph moves in and takes control of the farm and places one of his brethren in charge of the farm and restocks with cattle and feed.
This scenario is repeated across the country and soon we have a northern tribesman and his brethren, cousins etc in charge of the farms and agricultural industry of the souther tribes in Egypt.
Suddenly, the wise men of Egypt see what is happening …
You’re right that no minister will resign. What the wheat for weapons scandal will do is bring forward the day when people just stop listening to this government.
It last happened in late 1995. Howard replaced Downer and Keating didn’t knock him out straight away, so people just stopped listening to Keating. He was doing his usual stunts, but only the pollsters had twigged to the fact that it was making zero difference. Same thing happened to the Coalition government in NSW around the same time.
People think that Howard is set until the arse falls out of the economy, but I don’t think that’s true. Interest rates go up one percent and the outer-suburban seats are ripe for Labor picking. Petrol prices won’t come down soon. If Costello had reformed the tax system (especially as it relates to welfare) he’d be reaping the rewards by now, but he didn’t so they won’t. The Nationals are facing decapitation if not disembowelment. The signs are there …
The flipside of the whole wheat scandal is that people stop giving the government credit for the porkbarrelling. Once that happens, it’s all over. That day is not some utopian dream, it is being brought forward by Cole so maybe Rudd should stop forcing the pace and start thinking about how he’d furnish Downer’s office differently.
OT, I’ve always felt that the various “deep space programs” were a waste of time. That is, until now!
“Barter based economy” is a misleading concept. Historically, things have usually moved from subsistence economies to palace economies (a command economy element on top of a subsistence economy), then some barter was added in, then cash transactions emerged, then the palace side of things became far less material, then the subsistence side did. You never had barter dominating and being replaced by cash; when it dominated cash, the other elements like subsistence were more material still.
“Well then, why is that when labour gets to be in short supply, and there’s indication that wages might rise to reflect that shortage, it’s presented as a catastrophe in waiting, rather than an acceptable market response?
“What’s so special about labour supply, compared to banana supply?
“I’m not an economist, so I hope your responses (if any) can be intelligible to mere mortals.”
Some economist answers to Spog’s interesting question, predictably, have concentrated on the second question and have ignored the challenging premise couched in the first question.
The operating word is “catastrophe”. This word goes beyond mere exchange value to touch something deeper.
The truth is that human beings do perceive that there is a qualitative difference between a banana and a worker. And this is the governing perception in the West:
People don’t compete with bananas. They compete with other people. People aren’t in a struggle for status against bananas, they compete with people. Think about how upset you get when you discover that a work colleague makes a higher salary than yourself.
If the world were simply a story of making the pie bigger for everyone, then status wouldn’t be an issue.
But status is an enormous, often governing issue. It’s about the share of the pie regardless of its size. Status is a zero sum game. A win for one is necessarily a loss for another.
Wages are an important marker of status. You don’t feel jealous of an expensive banana. A higher-paid colleague enrages you.
As Balzac said: “It is insufficient that I succeed, my friends have to be seen to fail.”
James,
You are right. I was speaking of currency and I said money. As we have discussed here previously the term “money” is a less precise term and I should be more cautious in the application of this term.
Lets for the moment adopt my definition. ie Does a central bank control the supply of currency.
If you are saying that central banks lack control over the amount of currency in circulation I am a bit surprised by your comment. They certainly have undisputed power to increase the currency in circulation (via the printing press) and they generally have an exceptionally large capacity to buy back their own currency using various reserves and assetts (typically bonds, foreign currency reserves and gold). It would be a very unusual situation where they lacked sufficient power to use open market operations to drive up the value of the currency by buying it back.
Do you assert that central banks lack control over the quantity of “currency” circulating in the economy?
If we limit the discussion to currency it is not so hard, at least conceptually. If we want to include credit instruments (ie deposits etc) and hence a broader definition of money then it is more difficult.
Interests is the price of credit. So we can certainly see the effects of supply and demand on the price of credit. However as “credit” and “currency” are near substitutes for eachother (as a medium of exchange) then it does get complex.
Regards,
Terje.
Terje, ‘in circulation’ means in the hands of the public. If you decided to deposit $100 today, ‘currency in circulation’ would fall, but the money supply would stay the same.
The RBA issues currency to the extent that people need it. It constitutes about a fifth of the money base and five percent of the money supply.
I doubt if anyone ever buys bonds or any other asset from central banks with currency. They would pay out of a deposit. The effect is to reduce financial institutions’ reserves.
The “supply of currency” simply isn’t a variable that has any consequences, least of all in explaining inflation. Not even monetarists (who thought the ‘supply of money’ determines the price level) had any particular interest in the amount of currency.
None of this is at all contoversial. The central bank links above might clarify things for you.