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It’s perhaps significant that, late yesterday, I told friends that I was in a pitbull mood. My teeth were going to sink into something hard; it could also be someone’s body part. I let the seething mood subside and found myself quoting Ephesians 4:26, which encouraged me to not go to bed angry. I closed the night by posting an image of a dog with a megaphone.

I was snarling yesterday

I was snarling yesterday

What had gotten my ire was two things. First, was the golf business about which I had written yesterday; my blog had gotten more airplay and I got some supportive comments from various people. Second, was a more mundane matter: the garbage men had collected bins from my yard, emptied them, then left them strewn in the street, with my gate wide open. This seemed to be just disrespectful. I do not keep my garbage out in the street, and I have the gate closed, not least because my daughter has a puppy, who is sometimes attacked by a neighbour’s dog. I wanted to exact revenge, or at least make my point clear. I asked on social media how I should react. I got no reply. (There’s a message there, and maybe I will step away from that arena. But, that’s a separate topic). I wanted to disable their truck the next time I saw them. Someone told me that it’s part of establishing ‘new relations’ with residents; once I’m better known then my bins will be given their due respect. Well, judging by the way my long-established neighbours’ bins were also in the street, I think this relationship-building is a long-term project. Which brings me to another point: the exchange rate.

As I woke early this morning, wanting to use the bathroom, another friend, currently working in northern Europe, noticed I was online and asked if I suffered from insomnia. I replied that I went to bed early, just after putting my 10 year-old to bed, at 9pm. I also used to trade foreign exchange, so am in the habit, sometimes, of waking for the European market opening (around 2am EST), catching up on news when I wake, and now thinking about topics for writing. Well, I heard a pack of dogs baying in the distance, and my topic was set.

Foreign exchange traders know that markets get fixated by things that do not matter much, but are eye-catching.

When theJ$ passed 90 to the US$, people were shocked...

When theJ$ passed 90 to the US$, people were shocked…(Courtesy of The Jamaica Observer)

These include round numbers, such as 100, and then steps in round numbers, such as 105…110. Action can be frenetic as these numbers are approached, and traders may be trying to defend or break the level for good reasons, for instance, if options are due to be triggered by crossing the barrier. Well, as far as I know, option contracts in the Jamaican dollar are not what caused interest in its approach to 100 to the US dollar, or its passing that for 105, and recently 110.

The J$ sprinted past 100 to the US$. Records are to be broken... (Courtesy of The Jamaica Observer)

The J$ sprinted past 100 to the US$. Records are to be broken…

I had a brief exchange last night on Twitter with a current government minister, Julian Robinson (@julianjay) and a senator (and former minister) of the Opposition, Jamaica Labour Party, Marlene Malahoo-Forte (@oohalam). It was about the nature of the exchange rate depreciation. The senator has mentioned exchange rate ‘strategy’. The minister said it was not ‘strategy’, but an ‘outcome’ and market-determined; I said it was not market-determined, but reflected intervention, so a strategy was at work. The minister then said all central banks intervene; I replied that not all do, eg, the US authorities. I cited the IMF’s annual Exchange Rate Arrangement study for 2013, which has Jamaica classified as having a ‘crawling-type’ regime (sounds like a nasty disease?). That seemed to close that aspect of the discussion online.

Classification aside, the minister made his very valid point that the exchange rate outcomes depended on fundamental factors; Jamaican needed to address the weaknesses there to give the exchange rate a chance to stabilise. This dealing with fundamentals should always be the case. Traders and central bankers know that fundamentals are just one factor, though, in the actual outcome, and they may not affect the rate quickly or consistently, not least because some of the pressure for the rate to move comes from sentiment. That can drive the exchange rate in any direction faster and farther than warranted by fundamentals. Tell me! Markets also are supposed to anticipate, and so may have already factored in the fundamental features, so react more to sentiment and news, or just a bit of whimsy and who has the most to play with in the market. Big boys, with big bucks, pushing little boys around. The central bank may want to smooth the exchange rate movement, but may also have a hard time doing so, depending on their available foreign exchange reserves and the market’s willingness to let them have their way. Generally, however, central banks cannot sail against the wind for very long.

The senator, whose basic feeling is that the exchange rate has moved too far and too fast, later posted a reference to a Bank of Jamaica paper entitled “Exploring Contribution of Temporary & Permanent Shocks to Real Effective Exchange Rate“, which she wrote indicated that there was ‘negligible benefit from depreciation’. Well, trying to be thorough, I searched for this paper. Thank goodness for the Internet, because at 3am in the morning, I did not have to knock on the door of a university library, or go to the Governor’s house, to find a copy. In the spirit of true collaboration, I’ve included a link to the paper: no need for us all to be walking around in our PJs trying to find copies in people’s garbage (I made a connection).

I am not going to read the paper at this hour, and am skipping the scary maths that I see. Its conclusions are notable, and I will give a bit more than the senator:

  • Despite the considerable depreciation, a major correction of the current account imbalance has not been observed, which indicates the need for structural changes in the economy.
  • Temporary shocks played a larger role in explaining the variation in the real effective exchange rate (REER), while the current account was largely driven by permanent shocks.
  • Over the past decade, the real sector in the Jamaican economy has not been able to facilitate the necessary adjustment that
    should take place from the REER to the current account.
  • We therefore conclude that this adjustment in the current account imbalance may not be entirely achieved through the manipulation of monetary variables such as interest rates but rather through enhancing the macroeconomic environment to increase productivity.
  • Policy should be more geared towards creating a macro-economic environment that can facilitate the increase in exports
    resulting in a boost in external competitiveness which would then cause a correction in the current account imbalance.

Now, that paper, based on empirical analysis, was written in 2010. Jamaica has not changed much in four years to invalidate the basic facts. So, we have a learned view from central bank economists that Jamaica’s current account problem was not much related to the exchange rate, and that its depreciation wont do much to improve Jamaica’s competitiveness; the key is our productivity. I’ve pointed to the need for the latter, even a few days ago; many others have, too. I have never had much belief in depreciation working to help Jamaica’s competitiveness–even putting me at odds with one of my employers in the past.

So, why has the exchange rate been allowed to slide as much as it has over the past 20 months? Now that I have reached that question, I need to pause for more than some tea. If our learned economists have concluded–caveats about personal views noted–why are we pursuing something that we have shown does not work? I don’t want to rush to any conclusions, so will ponder that for a while.

The IMF has stated that Jamaica’s real effective exchange rate was overvalued; the nominal deprecation during the current programme has done much to reduce that overvaluation. The Fund indicated that the latest situation was due for a full review during the next Article IV Consultation, which has just concluded, with the team flying off to Washington last weekend. So, we may get a better idea of what the state of the real exchange is. The internal logic of the IMF programming means that it would be a hard sell to Management and the Executive Board, for a country with a severe balance of payments problem, wanting to use IMF resources, was allowed to do that with a real exchange rate that is highly overvalued and not programmed to see that eroded. But, if its being brought down doesn’t matter much in changing the real economy–and, in some sense, is a cosmetic numerical shift–then, the pain it has exacted on the population by eating away at peoples’ J$ wealth (by some 20 percent) needs a good explanation. That may be round two of exchanges, but should really be a broader discussion. I go back to the PM’s budget speech about ‘balancing people’s lives, while balancing the books’. Maybe, it wasn’t dogs that I heard howling.

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