Section III Extra Credit Sources (for Tufte's ECON 2020, All Sections, Spring 2022)

For 3/21

Last Monday's topic was the likely default on bonds by Russia. Somewhat amazingly, that didn't happen. 

International sanctions cover as many accounts of the Russian government as they can find. It is believed that this is about 60% of them, leaving about $100,000,000,000 in various foreign currencies in foreign accounts that they can still access. And they used this to make interest payments on those bonds of just over $100,000,000. 

They owe more payments on different bonds this week and next, both times in euros. They may yet default on those, or other later bond payments.

To say this is macroeconomically weird and unique is an understatement. This would be like a thug in a movie sending their lawyer to the bank with a briefcase full of cash to pay off their Visa bill because UPS delivers to the secret hideout and Amazon only takes cards.

In the real world, it was unusual, and here's how the events unfolded on Tuesday and Wednesday. There's a lot in those two links, so they are both optional: for the curious only. Any extra credit question will come from the content of just this post.

For 3/18

Today I'm just going to send you over to the post I put up for the ECON 3020 class yesterday. The first section is about Wednesday's rate increase. The second section relates to stuff at the end of Chapter 11. You can skip the tiny third section.

Remember, all the posts on SUU Macroblog are required for them. The only ones that are required for you are ones like this that I link to. Feel free to browse through the rest of them though.

For 3/16

The FOMC is meeting today, and an announcement is expected about 11 am our time. I would call this the most uncertain outcome in a very long time.

There are members who are worried about inflation, who are pushing for a 1/2 percentage point increase in the target interest rate. Interest in that has moderated somewhat, so I think 1/4 seems more likely. But, with the war in Ukraine, and the uncertainty of sanctions backfiring, my guess is that some will be interested in no change in rates at all. My odds on those 3 choices is 20/50/30.

This article entitled "Forecasters Expect Big Upward Shift in Fed’s 2022 Inflation Outlook" from the Wall Street Journal summarizes the expectations this morning.

***

In other news, Democratic Senator Manchin announced on Monday that he would not vote to approve Biden's nominee to the Board of Governors Sarah Bloom Raskin. On Tuesday she withdrew her nomination.

For 3/14

The post from 3/11 was about the exchange rate: the ruble is worth less than it was before.

Today's post is about bond default. At the end of the post, it circles back to the lower value of the ruble.

Governments borrow money. Governments borrow money from their own people (or investors for those people, like pension funds) if 1) those people are rich enough to have money to lend, 2) the country has a financial system that's well developed enough to connect lots of small lenders with a big borrower, and 3) the people actually trust their own government and will lend to it. It's not a good sign if your government borrows outside the country, and Russia has had trouble with all three of those.

To reduce costs, all big borrowers prefer to borrow by selling bonds rather than taking out a loan.

So Russia has borrowed a lot by selling bonds to Europeans (called Eurobonds), with interest that's supposed to be paid in euros. This week, Russia will probably default on those bonds.

What a default means is 1) the borrower has the lender's money, 2) the borrower is supposed to pay the lender back a little bit at a time, and 3) the borrower is stopping that. This hurts the lenders a lot more than the borrowers.

The way the lenders get back at the borrowers is to ... well ... complain a lot, and refuse to lend the borrower more money until they start repaying again.

The trick this time around is that bonds almost always stipulate the exact currency the borrower is supposed to pay in. But these particular bonds allow Russia the choice of paying in euros or rubles. Which do you think they're going to choose? Duh.

There is a decision-making body that decides if these things are OK. They are probably going to rule that Russia can't 1) take an action that reduces the value of the ruble and then 2) switch to paying with those rubles. If they do rule that way, a default will be declared if Russia tries to do that.

For 3/11

Economic sanctions are a way to hurt a country (and usually it's people too) by limiting commercial prospects from which they might make money.

For other countries this usually means limiting trade in some way to isolate the problem country. This hurts both countries, but the hope is that the isolated country is less able to handle the financial pain.

The most immediate way to assess whether a country is to look at its exchange rate. This is the amount of one currency that you have to exchange to get a different currency.

This works because as firms and people get worried about the future of a country, they try to get their wealth out of that country and into a preferable one. To do this, they have to sell that wealth in that country for the money of that country, then exchange the problem country's money for the money of a preferable country, and then reinvest their wealth there.

There are two mirror image ways to measure exchange rates. Always pay attention and make sure you know which one you have. One would be the number of rubles (the Russian money) that you need to buy one  dollar, and other way would be how many dollars does it take to buy one ruble.

Using the first one only (figure out the second on your own). If someone has wealth in Russia, and they want to get it to America, and they're in a panic about this, they will offer more rubles for each dollar. That's called a depreciation.

This is easy information to find. I put these keywords (ruble dollar exchange rate) into Google and their exchange rate tool popped up at the top of my search page. Click "1M" above the graph so that it shows just the last month. The exchange rate has depreciated from about 75 rubles to the dollar, to around 125 rubles to the dollar. This is a bad thing for Russia: it means the funds anyone there would use for international business or travel are now worth 75/125 = 60% of what they were a month ago. In short, everyone got poorer whether they wanted to or not.

For 3/9

Since Russia invaded Ukraine, the U.S. and other countries have placed "sanctions" on Russia.

What the heck are those? 

It turns out that in this case, there's more than one kind, so I'll be posting about this for extra credit more than once.

First off, there's economic sanctions, and then there are non-economic ones. The economic ones are mostly macroeconomic (but that's a long word that people avoid). Non-economic ones would be stuff like cancelling travel visas, or asking diplomats to leave your country.

Broadly speaking, there's a sense in which you could view a country as being like a retailer, and other countries as its customers. 

Digression (not for extra credit): As an economist, I'm not really sure I like it that politicians and bureaucrats make this simplification. They do it because they see it as an avenue to avoid a shooting war. But making this assumption also leads to a bunch of weird situations of its own (and might even make a shooting war more likely later on, although no one would admit to that).

Anyway, a sanction is like a customer complaint that turns into some refusal to pay for something: either we won't pay for what we already received, or we won't buy anything you have to offer for a while (maybe forever).

They've been doing various forms of sanctions for the last 2 weeks, but the one that came along yesterday was that Biden is going to ban imports of Russian oil and gas. This won't happen completely and immediately because there's some oil and gas that has been bought and paid for but not delivered yet. It's all supposed to be shut off within 45 days.

For 3/7 

There's so much news that it's seems like so long ago that Russia invaded Ukraine. But the last extra credit topic below was from the day after, and I'd already been saving it to post.

You can tell a lot about the international situation by looking at tables of GDP ranked across countries. One type tells you how big the country's economy is, and another tells you how rich it is. The difference is size of the population (remember Chapter 9?).

There's roughly 200 countries on the planet, and the run in size from the U.S. and China, down through tiny ones (the economy of Iron County is larger than that of about 40 countries). The tables also show "dependencies" which are not independent countries, but act as if they're independent from their home country (for example, Puerto Rico, Greenland, and Hong Kong). 

Ranking is also sketchy. It's just an inherently difficult thing to do fairly and accurately. So while there are numbers for the ranks, view them as guesstimates.

In the early 90's, the Soviet Union broke up. It has "states", and all 15 of them went in separate directions. The biggest one was Russia. The next two most important ones were Ukraine and Kazakhstan.

► For bigness ...

Russia is ranked in the 10th to 15th range. Larger than most countries, but still less than 10% of the size of the U.S. It's not quite as big as the big 4 European economies (Germany, France, the UK, and Italy). Russia has an outsized reputation, based almost completely on the fact that they have a lot of nuclear weapons.

Ukraine is about 50th, and about 10% of the size of Russia.

Bravery, courage, and elan get attention. Bigger economies win wars. But, sometimes the smaller country can make it so expensive for the bigger country that it's not worth it. Big countries that avoid that tend to try and wreck the smaller country's economy (for example, this is not what the U.S. tried to do in Afghanistan, Iraq, Vietnam, and Korea).

In short, Russia is a bully from across town that's beating up their cousin in public. But not one much wants to interfere because he has a lot of guns stashed in his house.

► For richness ...

The top of the list is here is dominated by offshore banking havens (i.e. money-laundering locations), tax havens (that attract headquarters of foreign businesses), and some (but not even most) oil producing countries.

Russia is much lower here, in the 80's. Ukraine is even lower, in the 130's.

The real fear in Moscow is that those newly independent states are doing better then Russia is. The Soviet Union kept the 14 non-Russian states a bit poorer (not much though, just ... enough). But now, places like Estonia, Lithuania, and Latvia rank in the 40's and 50's. And, all of the former eastern European countries that were in the Warsaw Pact with the Soviet Union are doing better than Russia too.

The analogy you should be drawing from both tables is that Russia is kind of like Brazil (big, but not huge, and kind of distant from us). And if that's the case, then an analog for Ukraine might be ... Peru. It would not be great if Brazil invaded Peru, but we wouldn't pay it too much attention because Brazil doesn't have nuclear weapons.

For  2/25 

On Monday, I posted the news from January that Biden has nominated 3 people for the Board of Governors of the Fed. This was a little premature because that news is most appropriate for this section, not that one. But I did that because the plot had already thickened, and I knew I needed to post this one too.

In preliminary hearings, the Republicans uncovered behavior by Sarah Bloom Raskin that they thought unethical. So they've indicated that they won't vote for her. Biden has not withdrawn her nomination yet, but he probably will.

She was expected to have an easy confirmation process because she already served as a Fed governor about 10 years ago. The problem is that she resigned, took a job in the private sector as a "rainmaker", and that firm (which was not a bank) appears to have gotten access to a regulatory service (that's only available to banks). They think she pulled strings for them.

This paragraph is optional, and will not be a source of questions. An unwritten rule of politeness in D.C. politics is that if it looks like someone does not have the votes to be confirmed, you let them know quietly so they don't get voted down in public. That's what's going on here. A similar case happened when Obama nominated Merrick Garland to the Supreme Court in 2016. This is often portrayed as political gaming, but it really wasn't: the Republicans let it be known he didn't have the votes, so they never started up a confirmation process. The Obama administration responded by not nominating anyone else so the issue would fester during an election year. That could have been political gaming, but it might also be that they figured no one they nominated would get the votes, so why bother.