Thinking globally: the US$ isn't the only currency!

The recent depreciation of China's exchange rate with the US$, to which it is pegged, garnered headlines. Until now those watching China believed that the RMB could only appreciate, leading to heightened foreign demand for Chinese assets by foreign speculators. Allowing a modest depreciation and increasing the intradaily trading band from 1% to 2% should discourage those expecting to make a quick buck by buying RMB today and selling tomorrow.

But how has the value of the RMB changed from a Chinese rather than a US perspective? China trades with the rest of the world and not just the US – Europe and Japan are major export markets and major sources of imports of luxury cars, machinery, semiconductors and other products – so the value of the RMB versus the Euro and the Japanese Yen also matters. Hence the concept of a trade-weighted exchange rate, conveniently provided in MS Excel format by the Bank for International Settlements in Basle, Switzerland. My graph presents their "effective exchange rate" calculation, to which I have added the bilateral RMB/US$, RMB/Euro and RMB/Yen rates, all indexed at 100 = average CY2010 value. Oh, and a higher value means a stronger RMB, and appreciation of its value, making it harder for firms in China to export and more attractive for them to import.

Because these other currencies move against the US$, there are periods when the RMB has appreciated or depreciated from the perspective of Chinese exporters and importers, even though the exchange rate was constant against the US$.

Automotive History II: Deciding on Layout

An article in the Economist on "tuk-tuks" - three-wheel vehicles common in a number of countries. In the rural Philippines car ownership is still only for the well-off, and taxis ... well, if you're well-off enough to afford a taxi, you can afford a car or get a ride from someone who does have one. On the other hand, tricycles are everywhere, a motorcycle with two seats beneath an awning in the back, spewing exhaust and drowning conversations, while guaranteeing that the clouds of dust never settle.

With hindsight we know why people want 4-wheelers, among other things stability at high speeds, but the idea of an inexpensive 3-wheeler persists. On the motorcycle end there's the 3-wheel "Can-Am" BRP Spyder, and the now-defunct Aptera Motors plan for a mass-market 3-wheel car. Now I've never seen an actual Aptera, though the Henry Ford [Museum] in Dearborn long had a rear-wheel drive 3-wheel vehicle from [pardon my memory] 1903 on display.

...not all niche configurations disappear...

Standard histories will note the shift from engines under the driver to the front-engine, rear-drive layout (nodding to the 1891 Systeme Panhard). But in the early post-WWII era 3-wheelers were also prominent in Japan; as late as 1960, they comprised the majority of vehicles made (and in Japan trucks dominated until 1968). Thereafter output fell, and then plummeted, but in 1963 roughly 1 million were in use. Several of today's manufacturers got their start making such vehicles, particularly Toyo Kogyo (today's Mazda), Daihatsu, and the Mizushima plant of what is now Mitsubishi Motors. Now Mitsubishi exited in 1962, shifting output to (small) 4-wheel trucks; Daihatsu made such vehicles until 1972, and Mazda until 1974.

Stability was an issue, and that became important as roads became better so that speeds rose and maneuverability less critical. (In Japan's case, licensing exemptions helped, lasting until 1965, but the industry was already dying.) Four wheels helped too as vehicles themselves became larger. But 3-wheelers persist, in forklifts and tractors. Though most have two wheels in front, they are close together to allow a short turning radius.

Ironically, at higher speeds modern electronic stability systems offset the tendency of trikes to turn over, braking selectively, and paring back the throttle. That however is for operations on standard roads. At lower speeds and off roads, stability remains problematic: farming is the most dangerous occupation in the US that employees large numbers, and one source of danger is overturning equipment. So 3-wheelers persist more widely than people realize, and their potential remains. Outside of commercial applications, however, there's no evidence that they will ever be more than recreational products: at first opportunity, most people move from smaller to larger cars, and the cost differential of using only 3 wheels surely can't offset that preference.

The larger story remains that the variety of potential vehicle configurations is large, and most have been produced at one or another time. Some persist in niches – 3 wheelers, rear- and mid-engine vehicles. Not all niche configurations disappear: today front-wheel drive accounts for most vehicles around the world.

The Consumer Financial Protection Bureau (CFPB) threatens Small Business

Ruggles/Banks 14 Feb 2014
AFSA 2014 Working Paper

The CFPB, created as a part of the sweeping Dodd - Frank Act, recently entered into a “consent agreement” with ALLY Bank. Penalty and restitution amounts to $98 million, plus ongoing costs mandated by the CFPB to ensure continued compliance with the “agreement.” According to the CFPB’s “methodology,” it was alleged that ALLY Bank was guilty of facilitating discriminatory lending practices that led to marginally higher interest rate markups by car dealers to certain “protected classes.”

Don’t assume that the CFPB has any direct method to identify who is a member of a “protected class.” The “methodology” used by the CFPB to determine who is and isn’t a member of a “protected class,” which is a narrow legal definition, is discussed later in this article. To call their methodology “imaginative” is an understatement. The CFPB finds fault in ALLY’s business practice of charging dealers a “Wholesale Interest Rate” and allowing them to mark it up on a case by case basis based on what can be negotiated with each borrower. This is common practice in the auto industry and lenders are referred to as a "finance source-assignees". According to the CFPB, this creates a system that imposes a “disparate impact” on certain protected classes even though there is absolutely no demonstrable intent to discriminate.

...The CFPB affects auto finance in ways hard to predict...

Automotive History I: Setting Standards

This is the first of a series of posts tracing the history of the automotive industry from an economics perspective. I'm a member of the Business History Conference, the Society of Automotive Historians and the Industry Studies Association [at least when I remember to pay my dues].

The early history of the industry offers many lessons for – or at least reveals common dynamics of – start-ups in an era of uncertainty about technology, vehicle use, customer base, distribution channels and revenue streams. In the background are common analytic issues: the setting of standards, the entry/exit process, and the eventual coalescence – not finalized until the 1920s – around organizational structures that dominate the industry today. We are again at a point of rapid technological change; will we see a similar upheaval? I argue no, because most pieces of the industry will not be affect. It will however take several posts to reach a point where I can make that case on the basis of evidence and models.

Early Entry: The Plaything Era

Early entry reflected uncertainty about what sort of power plant might be practical.