Friday, June 11, 2010

Out Of Character

Matt Ygelsias posted an excerpt and bolded this sentence:
weak U.S. economy still requires the Fed to hold interest rates relatively low, keeping them at zero is both dangerous and unnecessary, generating little extra output in the United States while creating hot money flows abroad.

Matt writes in response:
As Brad DeLong observes this is why different countries have different currencies and different monetary policies. In Brazil, unemployment is currently low and inflation is currently on the upswing. Consequently Brazil is raising interest rates. It’s possible that Brazil’s economy would be better off if the Brazilian monetary authorities had raised rates sooner or faster, but this is really a question for Brazil. Brazil is impacted by the United States, but it’s not America’s job to conduct Brazil’s monetary policy (note that if we tried to do this we’d do a lousy job), it’s Brazil’s job to adjust to global conditions in a Brazil.

Wow, that doesn't sound like a nice, liberal, multilateralist to FLG. Sounds like, "Hey Brazil, we'll run our economy how we damn well please and you can fucking suck on it."

FLG, apparently unlike Mr. Ygelsias, has taken a few courses on international finance. Consequently, he knows that raising interest rates makes Brazil more attractive to hot money flows. Think about it for ten seconds. If interest rates in the US are 0% and it's roughly 10% in Brazil, then all other things being equal where would you keep your money? If it went to 11%? You get the idea. And that's ignoring potential gains from exchange rate fluctuations caused by the inflows.

Not that FLG thinks that the Fed should worry about Brazil's economy when formulating monetary policy, but Matt seems both out of character by telling another country to suck it and wrong, as per usual, on the economics.

UPDATE: After reading Brad Delong's piece, he makes the argument that the strengthened local currencies would dampen asset price bubbles in the developing countries. So, according to this line of argument, Brazil raises interest rates, draws in hot money, the currency appreciates, and then then financial asset prices in local currencies fall. This is interesting and FLG will have to think about it more. This still doesn't change that Matt doesn't know shit about econ.


The Ancient said...

FLG --

Why is it that Brad and Paul find themselves arguing in a vacuum? Is it that the rest of the world's macro-economists are stupid or ill-informed?

(I've put the ball on the tee. Now swing.)

((You can do this.))

FLG said...

What is they're arrogant and delusional, Alex?

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