Gisele's Monies

BBC reports that Brazilian model Gisele Bundchen has asked Proctor and Gamble to pay her in Euros (Gisele's spokeswoman denies the arrangement). Frantic as ever, on Nov. 7 CNBC’s Jim Cramer blamed news of Gisele’s request for fueling a market sell-off.

Lost in the jokes about supermodels becoming arbiters of international finance is this reality – Gisele’s request makes no sense. The reason is that eleven trillion dollar a day entity known as the foreign exchange market. On the forex one can instantly translate dollars into euros for miniscule transaction fees. Thus, if Gisele is genuinely worried that further declines in the dollar will erode her purchasing power, she could just take her lump-sum payment and immediately convert it into euros.

Alan Greenspan made this point a few months ago in his 60 Minutes interview with Leslie Stahl. In one of many futile attempts to divine Greenspan’s views about the market, Stahl mentioned Greenspan’s multi-million dollar book advance and asked, if he had the choice, what currency Greenspan would prefer to be paid in. Greenspan made the above point that the possibility of currency conversion made the currency of payment inconsequential; the choice with real economic consequences, he noted, is in what currency-denomination one holds one’s long-term assets (e.g. U.S. stocks versus European stocks). Unsurprisingly, Greenspan recommended diversifying one’s assets among several currencies to hedge against depreciation risk.

By the way, I’m assuming that Gisele gets a lump-sum payment akin to a book advance. If her P&G contract is pro-rated over several years, then her request to be paid in euros at least has some logical grounding. As a practical matter, however, Gisele still risks shifting into euros at the wrong time. Over the past year the dollar has already lost more than 70 percent of its value against the euro (today it takes $1.46 to buy a euro; a year ago it took 84 cents). Over, say, the next year, can the dollar really fall much farther? Goldman’s Jim O’Neill doesn’t think so, and he is not a prognosticator to be taken lightly. Rather than dabbling in currency speculation, the safest way for Gisele to protect her income is simply to have P&G index her salary to America’s C.P.I. or some other measure of price inflation.

On more substantive currency matters, yesterday's NYT informs us that the dollar hasn’t fallen nearly as much against the Yen (or other Asian currencies) as it has against the Euro. I, for one, hadn’t realized this – and it’s a useful reminder that currency pairs do not all move in tandem.

Also, Paul Krugman has a fine blog post explaining why he is skeptical of prophecies that the dollar’s decline will seriously reignite U.S. inflation (he cites a combination of relatively low pass through from exchange rates to U.S. import prices, plus imports only totaling about 15 percent of U.S. GDP). Always refreshing to see Krugman make the case for stability rather than crisis.

Giuliani - Again Showing Exquisite Professional Judgment

Displaying characteristic good judgment of the kind that marked his support for Bernie Kerik as Homeland Security chief, Rudy Giuliani is now apparently taking his foreign policy cues from Norman Podhoretz. Podhoretz's views - particularly in regard to Iran - strike me as simply deranged, but read this interview and addendum in the New York Observer and make up your own mind.

For those who upon reading such an interview simply itch for a counter-punch, read Krugman's op-ed today.

Understanding Free Trade

Often embattled in both lay and elite opinion, free trade is in danger of losing majority support in this country. WSJ and Pew research polls show support for free trade slipping among both Republicans and Democrats. As Sherrod Brown and the rest of the 2006 "Lou Dobbs Democrats" assume their places in Congress, one should not imagine opponents of free trade as merely the likes of Nader, Perot, and Buchanan - harsh words for free trade are becoming mainstream. As an active member of the Democratic Leadership Council, Harold Ford Jr. criticizes China's "unfair trading practices." Recall that DLC was a mainstay of pro free trade thought during the Clinton years, especially during the early battle over NAFTA. At the "YearlyKos" blogger convention in Chicago this August, Hillary Clinton responded to a question about NAFTA with a thumbs down. John Edwards says if elected he does not even want Congress to renew Presidential Trade Promotional Authority (so-called "fast track" authority that enables the President to submit trade deals to Congress for an up or down vote, no amendments). Given that in 1998 - when the national economic mood was far brighter - President Clinton could not persuade House Democrats to support TPA renewal, it seems highly unlikely any Democrat elected in 2008 would be able to keep TPA anyway. In the next few years U.S. bilateral trade negotiations will probably grind to a halt.

All this brings to mind a fascinating (if dated) piece by Paul Krugman about why the idea of comparative advantage is so difficult for people to comprehend. This piece focuses mostly on elite opinion - the attitudes of financially anxious middle-class families or laid-off manufacturing workers are not foremost in Krugman's analysis. Yet the views of taste-makers inevitably filter down to ordinary Americans looking to find culprits behind their economic woes. Anyone with an interest in defending this beleaguered idea will do well to read Krugman's essay.