Benn Steil

Geo-Graphics

A graphical take on geoeconomic issues, with links to the news and expert commentary.

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Move Over Big Mac: The Law of One Price Is Lovin’ Our Little Mac Index

by Benn Steil and Dinah Walker
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The “law of one price” holds that identical goods should trade for the same price in an efficient market. To what extent does it hold internationally?

The Economist magazine’s famous Big Mac Index uses the price of McDonald’s burgers around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose. Yet it travels badly—cross-border flows of burgers won’t align their prices internationally. Read more »

Will China Bail Out Russia?

by Benn Steil and Dinah Walker
Russia's International Borrowing Options

Russia’s foreign exchange reserves have fallen by nearly 1/3 since October 2013; they’ve fallen 20% just since September 2014.  Whereas the country still has over $300 billion in reserves, about $150 billion of this may be illiquid; it also has close to $700 billion in external debt. Read more »

Employment Data Suggest Fed Could Be “Patient” Until 2016—or Later

by Benn Steil and Dinah Walker
Inflation Tracks the Employment/Population Ratio

In its last two statements, the FOMC has said that it “expects inflation to rise gradually toward 2 percent over the medium term”—2 percent being its target rate. What would it take to move it there?

We looked at how many different variables correlate with the Fed’s preferred inflation measure—core PCE inflation. Oil and the dollar have been much in the news of late, but their prices have had little relationship with core PCE inflation over the past decade, as shown in the bottom-left figures above. The single variable that seems to correlate best, as seen in the top-left figure, is the employment/population ratio among adults aged 25-54 years. If we follow this ratio’s trend-line since 2013, when it began its last major upturn, this suggests that core PCE inflation won’t hit 2% until late 2016 or early 2017—as seen in the large right-hand figure. If we follow it since its trough in 2011, core PCE inflation does not hit 2% until late 2017. Read more »

Which Countries Should Fear a Rate Ruckus?

by Benn Steil and Dinah Walker
EM bond yields taper reaction

For many Emerging Markets, May 22, 2013 is a day that will live in infamy.  It marks the start of the great Taper Tantrum, when Ben Bernanke’s carefully hedged remarks on prospects for slowing Fed asset purchases triggered a massive sell-off in EM bond and currency markets. Read more »

The Politics of IMF Crisis-Country Growth Projections

by Benn Steil and Dinah Walker
IMF growth projections vs reality Greece and Ukraine

IMF GDP growth “projections” accompanying emergency lending programs are nothing of the sort; they are targets the level of which is necessarily set high enough to enable the interventions.

Take Greece.  After committing to lending of €30 billion over 3 years in 2010, the Fund projected that the crisis-mired nation would return to growth by 2012.  As shown in the left figure above, Greece’s economy actually plunged by 7% that year – the year it completed the world’s largest sovereign restructuring, covering €206 billion of bonds. Read more »

Bank Valuations Tank as ECB Flubs Its Stress Test

by Benn Steil and Dinah Walker
european bank valuations before and after stress test

Low market valuations (i.e., price to book ratios) for euro area banks reflect market concerns over their capital cushions, opined the Bank of England just prior to last-year’s launch of the ECB stress tests—the long-awaited results of which were published on October 26.  The tests, “by improving transparency,” said the BoE, have “the potential to improve confidence in euro area banks.” Read more »

The ECB Fails to Stress Banks Over the One Critical Variable It Controls: Inflation

by Benn Steil and Dinah Walker
ECB Stress Tests Inflation Scenario

Relentlessly falling inflation is bad news for Eurozone banks.  It increases the real (inflation-adjusted) value of borrower debt and the real cost of servicing that debt.  It causes loan defaults, and therefore bank loan losses, to rise.

So with Eurozone inflation, currently at a near-record low of 0.4%, clearly at risk of heading into deflationary territory, what did the ECB say was the “adverse scenario” for this year?  Inflation of 1% – more than twice its current level.  This is indefensible; the ECB’s dire scenario for this year is actually much cheerier than the IMF’s baseline forecast, which pegs inflation at 0.5%.  The country-by-country comparison is shown in the graphic above. Read more »

Our Fed Dual-Mandate Tracker Affirms Taper Timing

by Benn Steil and Dinah Walker
Fed Performance Measured

St. Louis Fed President James Bullard continues to burnish his reputation as the FOMC’s least predictable member, reversing course on policy for the second time in 3 months—going from dove to hawk and now back to dove again.  Having as recently as August publicly advocated a rate rise in early 2015, he is now calling for the Fed to halt its monthly taper of QE3 bond purchases, citing falling inflation expectations. Read more »