03 March 2013

Seeing the Trees for the Forest

A three-peat of grist for both the quant and macro-policy mills, all in today's NY Times (that's a surprise). Both versions of this endeavor have mentioned the importance of the Bretton Woods agreement to both the growth of the US economy, and thence its collapse post-OPEC oil embargoes. That's covered in a book review relating how Bretton Woods got done.
America was unscathed at home and far stronger in 1945 than in 1941. Owner of the bulk of the world's gold bullion, a stunning 20,000 metric tons, the United States wanted to emerge from World War II with fixed conversion rates assured by a dollar tied to gold. And it went without saying that it was bent on becoming the globe's financial capital.

In other words: the USofA ran international finance. One effect was to create a blue collar middle class, never seen before in human history, which supported not only production domestically, but provided a market for the rebuilding economies of both the Allies and the Axis Powers. We gave with one hand (Marshall Plan), and taketh away with the other (Bretton Woods).
Although America's global dominance has long since melted away, no substitute is yet strong enough to shove the dollar aside, in part because of Bretton Woods.

Next, The Great Divide, a continuing series muses on the notion of consumption versus capital. I don't agree with much of the argument, but it's impossible to ignore this:
A consumption bias, economists argue, is not a bad thing, as it leads to cheaper goods for Americans. And after all, someone has to do the consuming -- otherwise, whom would the Germans and Chinese export to?

Of course, no one.

Which leads to Friedman's take on a climate change report. I've been unable to track down reporting I read ages ago, which asserted that the dissolution of the USSR wasn't Gorbachev's policy, but rather a rebellion driven by extended crop failures. This always made more sense. Now, we have reporting that crop failures motivated revolts in Arabia.
The numbers tell the story: "Bread provides one-third of the caloric intake in Egypt, a country where 38 percent of income is spent on food," notes Sternberg. "The doubling of global wheat prices -- from $157/metric ton in June 2010 to $326/metric ton in February 2011 -- thus significantly impacted the country's food supply and availability." Global food prices peaked at an all-time high in March 2011, shortly after President Hosni Mubarak was toppled in Egypt.

Consider this: The world's top nine wheat-importers are in the Middle East: "Seven had political protests resulting in civilian deaths in 2011," said Sternberg. "Households in the countries that experience political unrest spend, on average, more than 35 percent of their income on food supplies," compared with less than 10 percent in developed countries.

Everything is linked: Chinese drought and Russian bushfires produced wheat shortages leading to higher bread prices fueling protests in Tahrir Square. Sternberg calls it the globalization of "hazard."

For the macro-policy folks: it's the distribution. For the quants: policy trumps data every time; more specifically policy responses to bad things happening in the world. Whether climate change is a perpetual Black Swan herd (yes, I just looked it up) or not, quants need look out the window to know what's going on.

Or not. Phil Factor relates:
I remember when a 'rocket scientist' friend of mine in the City of London worked out, a while ago, that the price of sugar futures contracts correlated directly with the weather in Chicago.
Why? Chicago was the center of the bulk of sugar futures trading, at the time. The traders merely looked out of the windows and reacted instinctively.

There be dragons.

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