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The Roundup: Tracking true inflation in troubled EM currencies

Argentina's President Cristina Fernandez attends a Special Committee on the Situation with regard to the Implementation of the Declaration on the Granting of Independence to Colonial Countries and Peoples at the U.N. headquarters in New York June 14, 2012.


EM currencies and the inflation shell game
As if it wasn't hard enough to catch (or avoid) those falling knives among emerging-market currencies. But now the Cato Institute is warning that some shoddy economic data may be under-reporting serous inflation problems in several struggling EM countries.

Research from Steve Hanke, senior fellow at Cato Institute and economics professor at Johns Hopkins University, looked at black-market pricing in several "troubled currency" countries (Argentina, Venezuela, Syria, Egypt, North Korea) to assess what the prevailing inflation and foreign-exchange rates were on the free market in those countries. The "implied inflation rates" found in the free market exceeded the governments' official inflation rates – in some cases by staggering margins.

For example, while Venezuela's official inflation rate is 54 per cent, he calculated the free-market implied inflation rate at 317 per cent. Argentina's official inflation rate is just under 11 per cent, but its implied inflation rate is 74 per cent.

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Similarly, the official exchange rates for the currencies of these countries are considerably overvalued, relative to the prevailing exchange rates on the black market. In North Korea, for example, the official exchange rate is 132 won to the U.S. dollar; on the black market, however, it takes more than 8,000 won to buy one U.S. greenback. Venezuela's official exchange rate of 6.30 bolivar to the U.S. dollar is a far cry from the black-market rate of 76.6 bolivar to the buck.

Dissing disinflation
Benjamin Tal has established himself as the front-runner for this year's Alfred E. Neuman Award in Canadian Economics, for his "what, me worry?" assessment of Canada's biggest economic concern – disinflation.

In a recent research report, the CIBC World Markets economist dissected Canada's consumer price index (CPI) to determine just where the country's lack of inflation is coming from. He figures that only about half the gap between the recent CPI inflation levels of around 1 per cent, and the Bank of Canada's inflation target of 2 per cent, can be attributed to the country's output gap – the excess supply of production capacity relative to demand in the country. The other disinflation bogeyman that the Bank of Canada has identified – heightened competition among retailers – doesn't look to be a major factor, given that the retail sector's profit margins haven't declined substantially, which is what we would have been expected to see if the retail wars were having a broad effect on pricing.

Digging deeper, Mr. Tal discovered that most of the deceleration in inflation over the past six months can be traced to just 20 per cent of the component items that make up the core CPI. And the culprits are known to be prone to mood swings – they are roughly 30 per cent more volatile than the rest of the index components. Because of this historical volatility of the components dragging inflation down, Mr. Tal doubts it can last; the disinflationary slowdown may prove transitory.

Jamaican bobsledders ride Dogecoin
Bitcoin may be fine if you want to swing drug deals, speculate in the market or thumb your nose at the global financial system. But if you want to go send someone to the Sochi Olympics, the alternative currency of choice is Dogecoin.

British newspaper The Guardian recently reported that those renowned innovators of winter sport, the Jamaican bobsled team, are getting to Sochi thanks to fundraising produced by the invention of Dogecoin, a "joke" electronic currency set up by some fans who heard about the team's need for money to get them to the Games. The Guardian describes Dogecoin as "a crypto-currency based on a combination of bitcoin, the popular digital money, and Doge, the internet meme that superimposes broken English written in Comic Sans onto pictures of Shiba Inu dogs." (I'm not going to pretend to be anywhere near cool enough to know what that means.)

As donations took off, demand for Dogecoin sent its exchange rate with bitcoin up 50 per cent in the space of 12 hours. When the fundraisers behind Dogecoin cashed out, they had raised $25,000 for Jamaica's two-man bobsled team of Winston Watt and Marvin Dixon.

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"As much as we have faith in Dogecoin to become the community currency of the internet, we still understand that the team need to buy their airfares in a fiat currency," said one of Dogecoin's creators, Liam Butler.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More


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