Euro crisis is the biggest danger to world recovery, says OECD.
But it is hopeful. It expects output to increase faster in the near future. Provided fiscal cliff is avoided and Europe does not fall apart, growth will pick up by 2014, just in time for your graduation.
Thursday 29 November 2012
75. Greece will be ok
in 2020 or some time later.
But at least for now, they will live to fight another day. An agreement between the IMF and the Euro area lenders will provide the next installment of EU money and keep lights in Athens on.
For how long? It is difficult to say: " the IMF had stuck to a bottom line of getting the Greek debt level to 120% by 2020, far below what eurozone and IMF inspectors concluded was possible."
The agreement is to have Greek debt, in 2020, to fall only to 124% of GDP, rather than 120%. The IMF would like to have some of Greek debt forgiven; te creditor countries do not agree.
Everyone will now wait to German elections in 2014 which will clarify what German voters want.
In a pinch, there is always Super Mario. Who?
The guy in the picture, Mario Draghi, the president of the European Central Bank. ECB can pump money into the Euro area as needed.
PS. In case you were looking for a Christmas present - look on the right of the page
But at least for now, they will live to fight another day. An agreement between the IMF and the Euro area lenders will provide the next installment of EU money and keep lights in Athens on.
For how long? It is difficult to say: " the IMF had stuck to a bottom line of getting the Greek debt level to 120% by 2020, far below what eurozone and IMF inspectors concluded was possible."
The agreement is to have Greek debt, in 2020, to fall only to 124% of GDP, rather than 120%. The IMF would like to have some of Greek debt forgiven; te creditor countries do not agree.
Everyone will now wait to German elections in 2014 which will clarify what German voters want.
In a pinch, there is always Super Mario. Who?
The guy in the picture, Mario Draghi, the president of the European Central Bank. ECB can pump money into the Euro area as needed.
PS. In case you were looking for a Christmas present - look on the right of the page
Wednesday 28 November 2012
74. A job opening
A job just opened, that of the Gover nor of the Bank of Canada. A short description is here
Important points:
Important points:
- The Governor of the Bank of Canada is the Bank's chief executive officer, and, as such, has control and full authority over the business of the Bank. The Governor also presides over the Board of Directors.
- The Governor of a country's central bank must have a thorough understanding of financial markets and the economy and possess wide experience in international finance. There are eligibility requirements laid down in the Bank of Canada Act, including a requirement that the Governor must be a Canadian citizen.
-
The Governor is appointed for a fixed term of seven years.
If a profound disagreement on the conduct of monetary policy were to occur, the Minister of Finance, with the Cabinet's authorization, can issue a written directive to the Governor specifying a change in policy. No directive has ever been issued.
So once you get it, you are pretty safe.
73. The Bank of England job is more difficult
As you know, the governor of the Bank of Canada accepted an offer to become the head of the Bank of England. The job is supposedly more difficult. This article points out that, at the Bank of Canada, the governor is the most important member of the policy-making body (the Governing Council).
Decisions are made by consensus, and only the governor has the right to change interest rates. The governor explains the changes and other members of the Governing Council talk to various stakeholders (business groups, bankers, etc) and provide the same explanation. Nobody offers a dissenting opinion.
In the Bank of England members of the policymaking body vote on the decision. Disagreement are accepted and dissent noted. The governor has less power.
David Dodge, Mr. Carney's predecessor points out other differences:
1. Bank and regulator talk to each other in Canada, less so in the UK;
2. Bank of England is responsible for bank regulation, Bank of Canada is not
3. What is the biggest financial centre in the world?
So Mr. Carney chose to be a smaller fish in a bigger pond. Given his character, he will try to become a big fish in the bigger pond. We will see how it goes.
By the way, the governor of the Bank of Canada has to be Canadian (see the next post), the governor of the Bank of England does not have to be British.
But, apparently, there is not much to do for the first 18 months
Decisions are made by consensus, and only the governor has the right to change interest rates. The governor explains the changes and other members of the Governing Council talk to various stakeholders (business groups, bankers, etc) and provide the same explanation. Nobody offers a dissenting opinion.
In the Bank of England members of the policymaking body vote on the decision. Disagreement are accepted and dissent noted. The governor has less power.
David Dodge, Mr. Carney's predecessor points out other differences:
1. Bank and regulator talk to each other in Canada, less so in the UK;
2. Bank of England is responsible for bank regulation, Bank of Canada is not
3. What is the biggest financial centre in the world?
So Mr. Carney chose to be a smaller fish in a bigger pond. Given his character, he will try to become a big fish in the bigger pond. We will see how it goes.
By the way, the governor of the Bank of Canada has to be Canadian (see the next post), the governor of the Bank of England does not have to be British.
But, apparently, there is not much to do for the first 18 months
Monday 26 November 2012
72. World economy in poor shape but our exports increase
Here is why: the Governor of the Bank of Canada, Mike Carney, will become the Governor of the Bank of England. It is a more interesting job as UK is a mess.
It is also a testimony to the excellent job of Bank's board. Mr Carney was selected from outside of the Bank 9 years ago.
It is also a testimony to the excellent job of Bank's board. Mr Carney was selected from outside of the Bank 9 years ago.
71. Three articles on taxes in the US
1. by Paul Krugman, Nobel Prize winner, a columist at NYT and a leading progressive economist.
Krugman argues that we should not worry about the deficit at present. The economy is weak and austerity (increasing taxes and reducing spending) can wait until the economy improves.
He argues that people who have been warning about the perils of the current deficit in the US are exagerating. The US economy is no Greece. Even though deficits are very high, interest rates are at historical lows.
Question: Indeed, even though the deficit in the US is greater than in Greece (as percentage of GDP). What is the main difference between Greece and US causing it not to be a problem?
2. by Steven Rattner, an investment banker who led the auto bailout
The main problem in the "fiscal cliff issue" is what to do with Bush tax cuts. In 2001-2003 the Bush administration cut the top tax rate from 39.6% to 35%. Republicans are against the return to old rates for anyone; Democrats want to increase tax rates on people making more than $250 000. Ratner looks at alternatives. These include limiting deductions, introducing minimum taxes on the rich etc.
\
3. Warren Buffett wants to pay a higher tax rate than his secretary.
Warren Buffett, the most successful investor in the world, started a debate on tax fairness by pointing out that his secretary pays a higher tax rate than he does. He suggests that:
- taxes on dividends can be raised without causing disruption in the economy
- there should be a "Buffett tax": anyone making over $1 mln should pay at least 30% in federal tax.
The argument against raising taxes is that it would depress investment. The return on investment is the amount after tax; the higher is the tax rate, the lower is the benefit of investment.
Buffet argues that, for the rich, the effect does not apply. They work hard making money regardless of tax rates. Note the extraordinarily high tax rates in the past.
Krugman argues that we should not worry about the deficit at present. The economy is weak and austerity (increasing taxes and reducing spending) can wait until the economy improves.
He argues that people who have been warning about the perils of the current deficit in the US are exagerating. The US economy is no Greece. Even though deficits are very high, interest rates are at historical lows.
Question: Indeed, even though the deficit in the US is greater than in Greece (as percentage of GDP). What is the main difference between Greece and US causing it not to be a problem?
2. by Steven Rattner, an investment banker who led the auto bailout
The main problem in the "fiscal cliff issue" is what to do with Bush tax cuts. In 2001-2003 the Bush administration cut the top tax rate from 39.6% to 35%. Republicans are against the return to old rates for anyone; Democrats want to increase tax rates on people making more than $250 000. Ratner looks at alternatives. These include limiting deductions, introducing minimum taxes on the rich etc.
\
3. Warren Buffett wants to pay a higher tax rate than his secretary.
Warren Buffett, the most successful investor in the world, started a debate on tax fairness by pointing out that his secretary pays a higher tax rate than he does. He suggests that:
- taxes on dividends can be raised without causing disruption in the economy
- there should be a "Buffett tax": anyone making over $1 mln should pay at least 30% in federal tax.
The argument against raising taxes is that it would depress investment. The return on investment is the amount after tax; the higher is the tax rate, the lower is the benefit of investment.
Buffet argues that, for the rich, the effect does not apply. They work hard making money regardless of tax rates. Note the extraordinarily high tax rates in the past.
Wednesday 21 November 2012
70. Greece - more problems
Finance ministers of the Eurozone did not come to an agreement on how to make Greek financial situation viable
The current goal is to for Greek debt/GDP ratio to fall to 120% in 2020. It is clear now it is not going to happen. An estimate says it will be 144%. There are three solutions
1. Stop support and let Greece go bankrupt. This seems to be the least preferred option.
2. Cut Greek debt
3. Lend Greece more money and reset the 120% goal to 2022.
Cutting Greek debt is the simplest approach, but
- Germany argues that, for debt to the EU, it cannot be done legally. The special fund that has been lending Greece money can only lend, not make grants;
- ECB (the European Central Bank) which holds a large portion of Greek debt would not agree;
- debt forgiveness for Greece would be unfair to countries that made the necessary reforms: Portugal and Ireland;
- debt forgiveness would entrench bad fiscal behaviour in Greece.
The current goal is to for Greek debt/GDP ratio to fall to 120% in 2020. It is clear now it is not going to happen. An estimate says it will be 144%. There are three solutions
1. Stop support and let Greece go bankrupt. This seems to be the least preferred option.
2. Cut Greek debt
3. Lend Greece more money and reset the 120% goal to 2022.
Cutting Greek debt is the simplest approach, but
- Germany argues that, for debt to the EU, it cannot be done legally. The special fund that has been lending Greece money can only lend, not make grants;
- ECB (the European Central Bank) which holds a large portion of Greek debt would not agree;
- debt forgiveness for Greece would be unfair to countries that made the necessary reforms: Portugal and Ireland;
- debt forgiveness would entrench bad fiscal behaviour in Greece.
69. Fiscal cliff warning
now from the Chairman of the FED. He warns that if nothing is done, the US economy will fall into recession.
68. What banksters are really afraid of
What is it? Insider trading. Why are they afraid of insider trading? Because it is prohibited by law and perpetrators go to jail.
So, to make bankers more accountable for their actions, better enforcement and jail penalties would do marvels. But somehow this does not happen.
There is more. Some insider trading is actually legal. How does it work? When new economic data are released, they often provide new information and markets move (you may have seen the movie "Trading Places". In this movie the information is the release of an estimate of the Florida orange crop; money is made by trading in frozen orange juice futures).
To allow everyone to have the same information, institutions (both private and public) that release data have a "lockup" period: data are announced to everyone publicly at a predetermined hour.
But in fact not everybody gets the information at the same time. High-frequency traders - firms that trade stocks very often with the help of computer algorithms, get it earlier. How? They pay the stock exchange for a direct line to their information system. This allows them to get information up to 50 nanoseconds before others. They can conduct trades in under 20 nanoseconds. So they can trade on the new information before others get it.
The definition of insider trading: trading using info not publicly available. Indeed, this is what is happening.
Who benefits:
1. High frequency trading firms
2. Stock exchanges that get paid for direct access.
And somehow it is legal. Beats me.
You can read about another example here
So, to make bankers more accountable for their actions, better enforcement and jail penalties would do marvels. But somehow this does not happen.
There is more. Some insider trading is actually legal. How does it work? When new economic data are released, they often provide new information and markets move (you may have seen the movie "Trading Places". In this movie the information is the release of an estimate of the Florida orange crop; money is made by trading in frozen orange juice futures).
To allow everyone to have the same information, institutions (both private and public) that release data have a "lockup" period: data are announced to everyone publicly at a predetermined hour.
But in fact not everybody gets the information at the same time. High-frequency traders - firms that trade stocks very often with the help of computer algorithms, get it earlier. How? They pay the stock exchange for a direct line to their information system. This allows them to get information up to 50 nanoseconds before others. They can conduct trades in under 20 nanoseconds. So they can trade on the new information before others get it.
The definition of insider trading: trading using info not publicly available. Indeed, this is what is happening.
Who benefits:
1. High frequency trading firms
2. Stock exchanges that get paid for direct access.
And somehow it is legal. Beats me.
You can read about another example here
Monday 19 November 2012
67. Risk behaviour of banks
The third article in the Bank of Canada review looks at bank behaviour when returns are low. It concludes that banks, in search of return, take on riskier activities, reducing requirements for risky borrowers. This is called the risk-taking channel of monetary policy. It works like this: as the central bank lowers interest rates to stimulate borrowing and investment, banks take on riskier projects, making it easier to get credit and strengthening the effect of the policy.
66. Money as a store of value; seigniorage as tax on crime
In the recent Bank of Canada report one article deals with cash holdings. The proportion of all transactions done in cash fall over time, but cash holdings increase in line with spending.
The authors of the article suggest that people hold savings in cash. This is not surprising: with nominal interest rates at record lows, the interest lost from holding cash instead of a bank deposit is minimal.
At the end the article mentions an interesting story that appeared in the National Post on Friday. The Bank of Canada stopped issuing the $1000 bill long time ago, and if a bank receives such bill it is sent to the Bank of Canada and destroyed. Yet there are still almost a million $1000 bills in circulation, with the value of almost $1bln. All this is seigniorage, paid by people using them, most likely for illegal activiites.
By the way, when Euro was introduced in 2002, the largest banknote was 500 Euro. This led to complaints by the US; Americans claimed, correctly, that this was an attempt to capture seigniorage away from the US. The $100 US is the most popular form of cash among criminals; using 500 euro notes instead reduces the size of suitcases cash needs to be carried in :). Cash used outside the country is pure seigniorage; the US would like to keep all of it.
And an interesting factoid: when the war in Iraq started in 2003, one of Saddam Hussein sons reportedly drove up to the Iraqi central bank to make a withdrawal of around $1 billion. He reportedly took $900mln in US cash and the rest in Euros. The money was later used to fund Iraqi insurgency.
The authors of the article suggest that people hold savings in cash. This is not surprising: with nominal interest rates at record lows, the interest lost from holding cash instead of a bank deposit is minimal.
At the end the article mentions an interesting story that appeared in the National Post on Friday. The Bank of Canada stopped issuing the $1000 bill long time ago, and if a bank receives such bill it is sent to the Bank of Canada and destroyed. Yet there are still almost a million $1000 bills in circulation, with the value of almost $1bln. All this is seigniorage, paid by people using them, most likely for illegal activiites.
By the way, when Euro was introduced in 2002, the largest banknote was 500 Euro. This led to complaints by the US; Americans claimed, correctly, that this was an attempt to capture seigniorage away from the US. The $100 US is the most popular form of cash among criminals; using 500 euro notes instead reduces the size of suitcases cash needs to be carried in :). Cash used outside the country is pure seigniorage; the US would like to keep all of it.
And an interesting factoid: when the war in Iraq started in 2003, one of Saddam Hussein sons reportedly drove up to the Iraqi central bank to make a withdrawal of around $1 billion. He reportedly took $900mln in US cash and the rest in Euros. The money was later used to fund Iraqi insurgency.
65. Interest rates and bond prices
We will be talking about it on Tuesday. Here is an article that says just that: if interest rates rise, bond prices fall.
Bond ETF (Exchange Traded Funds) are saving instruments sold to general public which follow bond prices. With interest rates at historical low, interest rates are likely to go up and bond ETF prices to go down.
The article mentions a simple calculation of bond losses from increase in interest rates. It is that, for a 1% increase in the interest rate, the price of bond will lose n% where n is the number of years to maturity.
This calculation is not quite correct; you will learn the detailed formula in your finance class.
Bond ETF (Exchange Traded Funds) are saving instruments sold to general public which follow bond prices. With interest rates at historical low, interest rates are likely to go up and bond ETF prices to go down.
The article mentions a simple calculation of bond losses from increase in interest rates. It is that, for a 1% increase in the interest rate, the price of bond will lose n% where n is the number of years to maturity.
This calculation is not quite correct; you will learn the detailed formula in your finance class.
Sunday 18 November 2012
64. And finally it happened!
For the first time, a rating agency was found responsible for bad ratings.
In Australia a court found that Standard and Poor liable for incorrect AAA rating for securities issued by ABN-Amro, a Dutch bank. According to the website: "The court ruled that S&P’s rating of AAA was misleading and deceptive and that S&P along with the issuing bank had been involved in the publication of information and statements that were false in material particulars and involved negligent misrepresentations being made to potential investors".
You also get an idea of the internationalization of financial markets. The securities were issued by a Dutch abnk, and bought by Australian municipalities.
In Australia a court found that Standard and Poor liable for incorrect AAA rating for securities issued by ABN-Amro, a Dutch bank. According to the website: "The court ruled that S&P’s rating of AAA was misleading and deceptive and that S&P along with the issuing bank had been involved in the publication of information and statements that were false in material particulars and involved negligent misrepresentations being made to potential investors".
You also get an idea of the internationalization of financial markets. The securities were issued by a Dutch abnk, and bought by Australian municipalities.
Thursday 15 November 2012
63. This sucks
Eurozone back to recession. Output fell in the second quarter by 0.2% and in the third quarter by 0.1%. Two consecutive quarters of output decline = recession
And it all started because a small country (Greece) cheated with its budget reporting and was borrowing 5% more than they said they did (or about $20 billion a year). Investors woke up from their unfounded belief that all is great and stopped lending to Greece, then Portugal, Ireland, Cyprus, Spanish banks etc. Total losses so far: trillions of dollars. The mouse ate the elephant.
And it all started because a small country (Greece) cheated with its budget reporting and was borrowing 5% more than they said they did (or about $20 billion a year). Investors woke up from their unfounded belief that all is great and stopped lending to Greece, then Portugal, Ireland, Cyprus, Spanish banks etc. Total losses so far: trillions of dollars. The mouse ate the elephant.
Tuesday 13 November 2012
62. The benefits of technology
According to International Energy Agency, the US will become the biggest producer of oil in the world by 2035. This is because of two developments: fracking technology that allows to get oil and gas trapped in rock formations (this technology s so new that the blog's spell checker does not know it) and horizontal drilling (no idea how they do it) which allows to extract up to four times the amount of oil from oil fields than earlier techniques.
When I was a student, a report of the Club of Rome painted a picture of resources being exhausted in the not too distant future. According to the report, it would have happened by now. But, as Yogi Berra famously said, "predictions are difficult, especially about the future"(actually, the first person attributed with this comment is the famous Danish physicist Niels Bohr - see here).
That, of course, does not mean that we should not conserve resources. While techonology helps, resources are finite. The International Energy Agency report takes into account conservation (for example fuel consumption standards) in its forecasts.
By the way, who is Yogi Berra? A baseball player with a fine sense of humour.
When I was a student, a report of the Club of Rome painted a picture of resources being exhausted in the not too distant future. According to the report, it would have happened by now. But, as Yogi Berra famously said, "predictions are difficult, especially about the future"(actually, the first person attributed with this comment is the famous Danish physicist Niels Bohr - see here).
That, of course, does not mean that we should not conserve resources. While techonology helps, resources are finite. The International Energy Agency report takes into account conservation (for example fuel consumption standards) in its forecasts.
By the way, who is Yogi Berra? A baseball player with a fine sense of humour.
61. Deficits will end a year later than expected
says our Finance Minister in the budget update (more on it later).
60. The fiscal cliff is everywhere
In today's National Post there are two articles of note. They are alarming, to say the least:
1. It will plunge Canada into a recession, says our Finance Minister.
2. It has not happened yet but the uncertainty is already hurting the economy, say the heads of Goldman Sachs and Bank of America.
1. It will plunge Canada into a recession, says our Finance Minister.
2. It has not happened yet but the uncertainty is already hurting the economy, say the heads of Goldman Sachs and Bank of America.
Monday 12 November 2012
59. The crunch in Greece.
Greece is, possibly, on its last legs. On Friday it needs to repay the European Central Bank 5 billion Euros. As it cannot borrow in international markets, it wants to borrow from Greek banks. The problem: the banks do not have enough cash to lend. To get the cash they need to provide a collateral, but they are also out of good collateral. So the collateral requirements need to be relaxed. In the end, they will most likely manage, and the funds will come from the ECB.
In other words, ECB will lend to others to have its own loan repaid by the Greek government.
It is similar, but not exactly the same, as a Ponzi scheme. In the Ponzi scheme, nobody knows the schemer borrows to pay of earlier debts. Here it is in the open.
In other words, ECB will lend to others to have its own loan repaid by the Greek government.
It is similar, but not exactly the same, as a Ponzi scheme. In the Ponzi scheme, nobody knows the schemer borrows to pay of earlier debts. Here it is in the open.
58. On central bank goals
While the Bank of Canada has one goal - making sure that inflation is between 1% and 3% and trying to maintain it close to 2%, the FED's task is more complicated: they have to control inflation, unemployment and interest rates. This is like hitting three birds with one stone: possible when they line up just so, but not likely. In this article Mike Moffat argues that the FED should concentrate on inflation. He points out two reasons: 1. it is not clear what unemployment rate should the FED target
2. It is not clear what tradeoff between inflation and unemployment should be.
ad 1. The central bank should target the natural rate of unemployment (the article uses NAIRU, which is a similar concept). But the FED does not know what the natural rate is. If it targets a rate that is too low, inflation will rise over time; if it targets the rate that is too high, there will be deflation.
ad 2. Dr Moffat asks a straightforward question: if a recession raises the unemployment rate to 10%, how high inflation should the FED tolerate to bring the unemployment rate down? Is 7% acceptable? Is 20%? It is difficult to say.
2. It is not clear what tradeoff between inflation and unemployment should be.
ad 1. The central bank should target the natural rate of unemployment (the article uses NAIRU, which is a similar concept). But the FED does not know what the natural rate is. If it targets a rate that is too low, inflation will rise over time; if it targets the rate that is too high, there will be deflation.
ad 2. Dr Moffat asks a straightforward question: if a recession raises the unemployment rate to 10%, how high inflation should the FED tolerate to bring the unemployment rate down? Is 7% acceptable? Is 20%? It is difficult to say.
Thursday 8 November 2012
57. Flexible labour markets
In the last lecture we studied labour demand. One factor was the the ease with which workers are hired and fired. The easier it is, the higher is labour demand since firms do not have to worry they will be stuck with unwanted workers when demand for their products falls.
This article is about the latest installment of EU help for Greece. As we mentioned, a worker who loses a job is entitled to a high severance payment. This was considered a problem and so one of the conditions imposed on Greece was introducing "measures making it easier to hire and fire workers".
By the way, the article describes how the process works. If Greece was to borrow in the open market, it would be paying around 20% interest on 10-year bonds. This is way too much so Greece is borrowing from a special fund set up by the EU, to which all EU countries contributed.
As a condition for the borrowing conditions are imposed on Greece. In this case, apart from job market reforms, it is required to reduce deficit by $17 billion.
The conditions have to be approved by the Greek parliament. Then protests erupt in the streets. But, as someone who was asked what he thinks of old age replied: "I prefer it to the alternative." If Greece does not get the help, it would either have to default on debt payments, or stop paying government employees, pensioners, welfare recipients, unemployed etc. Stopping government payments is, essentially, forced borrowing, mostly from the vulnerable part of the population.
This article is about the latest installment of EU help for Greece. As we mentioned, a worker who loses a job is entitled to a high severance payment. This was considered a problem and so one of the conditions imposed on Greece was introducing "measures making it easier to hire and fire workers".
By the way, the article describes how the process works. If Greece was to borrow in the open market, it would be paying around 20% interest on 10-year bonds. This is way too much so Greece is borrowing from a special fund set up by the EU, to which all EU countries contributed.
As a condition for the borrowing conditions are imposed on Greece. In this case, apart from job market reforms, it is required to reduce deficit by $17 billion.
The conditions have to be approved by the Greek parliament. Then protests erupt in the streets. But, as someone who was asked what he thinks of old age replied: "I prefer it to the alternative." If Greece does not get the help, it would either have to default on debt payments, or stop paying government employees, pensioners, welfare recipients, unemployed etc. Stopping government payments is, essentially, forced borrowing, mostly from the vulnerable part of the population.
Wednesday 7 November 2012
56. A good development
A big problem in the last four years was the unwillingness of congress Republicans to cooperate on fiscal matters with Democrats. They demanded that any changes consist 100% of spending cuts, and that taxes cannot be raised. This may now change. The House Speaker said yesterday that House Republicans are ready to cooperate and will accept higher taxes under the right conditions. Perhaps Thelma and Louise ending can be avoided.
55. Stock markets after the election or Why you should understand economics
I have found a good example of the problem that has been bugging me for a long time: explanations of what happened in the stock market. There is a whole industry trying to explain each day what happened: why stocks went up, why they went down etc. The problem is that, even with the benefit of hindsight, some of those comments do not make much sense. Hindsight is supposedly 20/20, but not in the case of financial commentators. I do not know why. But I do know that all these explanations sound plausible. To distinguish good from bad from nonsense you need basic financial and economic knowledge.
So to the example. Yesterday President Obama was reelected. Today markets fell by around 3%. Why?
This article explains that "investors' focus shifted to the looming "fiscal cliff" debate and Europe's economic troubles."
That article explains that "despite the fact that polls had been indicating for some time that President Obama was likely to win, that expectation was not shared by many financiers."
Who is right? The first article sees investors as not being able to do two things at once: follow an election and focus on the fiscal cliff and Europe's problems. They devoted all their attention to the election and only with the election over they noticed other problems.
That is silly.
The second article uses reasoning based on one conclusion from the efficient markets hypothesis: expected events do not affect stock markets. So the fact that markets reacted negatively to Obama's win means that investors did not believe he will win. That is surprising because the numerous polls left little doubt, but never underestimate people's ability to delude themselves in political matters.
So the second explanation makes sense, the first does not.
In the future you will be playing the markets so you need to understand the causes of market movements.
So to the example. Yesterday President Obama was reelected. Today markets fell by around 3%. Why?
This article explains that "investors' focus shifted to the looming "fiscal cliff" debate and Europe's economic troubles."
That article explains that "despite the fact that polls had been indicating for some time that President Obama was likely to win, that expectation was not shared by many financiers."
Who is right? The first article sees investors as not being able to do two things at once: follow an election and focus on the fiscal cliff and Europe's problems. They devoted all their attention to the election and only with the election over they noticed other problems.
That is silly.
The second article uses reasoning based on one conclusion from the efficient markets hypothesis: expected events do not affect stock markets. So the fact that markets reacted negatively to Obama's win means that investors did not believe he will win. That is surprising because the numerous polls left little doubt, but never underestimate people's ability to delude themselves in political matters.
So the second explanation makes sense, the first does not.
In the future you will be playing the markets so you need to understand the causes of market movements.
Tuesday 6 November 2012
54. More alarm
The election is today and people are already worrying about the fiscal cliff.
This is a very good article that deals both with economics and politics of the fiscal cliff. You should read it
This is a very good article that deals both with economics and politics of the fiscal cliff. You should read it
Monday 5 November 2012
53. The fiscal cliff - a wake up alarm
Since posts 45 and 46,policymakers finally expressed alarm about the fiscal cliff. In Mexico City on Sunday, finance ministers of G20 called the fiscal cliff the biggest danger to the world economy (although some were more worried about the Eurozone crisis).
Jim Flaherty, our Finance minister, said the fiscal cliff is the biggest danger to the Canadian economy
You heard it here first (about the danger of the fiscal cliff) .
Jim Flaherty, our Finance minister, said the fiscal cliff is the biggest danger to the Canadian economy
You heard it here first (about the danger of the fiscal cliff) .
52. The Euro Crisis
In the search of a good source (since we cannot use the Globe any more) I found a very useful set of data at the BBC website. It provides data on GDP growth, unemployment rate, deficit and debt for Euro-zone countries and the UK since 1999.
You should look at the data and play with the interactive graphics. I did, and here are some observations:
1. Unemployment: compare Germany with Spain and with Greece. The unemployment rate in Greece was lower than in Germany as late as in the second quarter 2008, the unemployment rate in Spain was lower than in Germany in the third quarter of 2007. Then the paths diverged. Since the third quarter of 2007 the unemploymnet rate in Germany fell by 3%; the unemployment rate in Greece and in Spain increased by over 15%.
2. In some European countries the Great Recession had little effect on the unemployment rate. Look at the graphs for Austria, Belgium, Germany and the Netherlands. At the other end are Slovakia and especially Estonia, where unemployment increased a lot, but started falling quickly.
3. The five countries that received EU help (Cyprus, Greece, Ireland, Portugal and Spain) all recorded very high increases in unemployment. Ireland seems to be past the worst period; the others are not.
4. The last time any country had a budget surplus was in 2008; since then every country except Estonia has been running a deficit. Deficits in some countries are absurd. The Irish government guaranteed bank debt and had a deficit of over 30% in 2010. Greece, Spain and UK seem to be basket cases.
5. Under the Maastricht treaty that created the Euro, debt to GDP ratio should be under 60%. Belgium, Greece and Italy have never reached that limit. In most countries it is now above 60%
6. Finally, look at two countries that are in good shape: Finland and Estonia. They have no debt or deficit problem. Estonia went through a wrenching recession but recovered remarkably well. Two years ago its unemployment rate was the highest after Spain; now it is less than a half of Spanish rate. Finland also went through a deep recession. Note that both countries have relatively high rates of unemployment.
You should look at the data and play with the interactive graphics. I did, and here are some observations:
1. Unemployment: compare Germany with Spain and with Greece. The unemployment rate in Greece was lower than in Germany as late as in the second quarter 2008, the unemployment rate in Spain was lower than in Germany in the third quarter of 2007. Then the paths diverged. Since the third quarter of 2007 the unemploymnet rate in Germany fell by 3%; the unemployment rate in Greece and in Spain increased by over 15%.
2. In some European countries the Great Recession had little effect on the unemployment rate. Look at the graphs for Austria, Belgium, Germany and the Netherlands. At the other end are Slovakia and especially Estonia, where unemployment increased a lot, but started falling quickly.
3. The five countries that received EU help (Cyprus, Greece, Ireland, Portugal and Spain) all recorded very high increases in unemployment. Ireland seems to be past the worst period; the others are not.
4. The last time any country had a budget surplus was in 2008; since then every country except Estonia has been running a deficit. Deficits in some countries are absurd. The Irish government guaranteed bank debt and had a deficit of over 30% in 2010. Greece, Spain and UK seem to be basket cases.
5. Under the Maastricht treaty that created the Euro, debt to GDP ratio should be under 60%. Belgium, Greece and Italy have never reached that limit. In most countries it is now above 60%
6. Finally, look at two countries that are in good shape: Finland and Estonia. They have no debt or deficit problem. Estonia went through a wrenching recession but recovered remarkably well. Two years ago its unemployment rate was the highest after Spain; now it is less than a half of Spanish rate. Finland also went through a deep recession. Note that both countries have relatively high rates of unemployment.
Thursday 1 November 2012
50. No end in sight part 2.
Record unemployment in Europe
Here is a simple comment on the situation in Europe: one small country (Greece) has done endless damage to the European economy.
How could the damage have been avoided? By running balanced budgets. A country which has a large deficit makes itself vulnerable to swings in credit markets.
Here is a simple comment on the situation in Europe: one small country (Greece) has done endless damage to the European economy.
How could the damage have been avoided? By running balanced budgets. A country which has a large deficit makes itself vulnerable to swings in credit markets.
49. No end in sight
of accusations of bankers' wrongdoing.
Now it is about manipulating California electricity markets.
Interestingly enough, the accusations now come with teeth:
"The FERC also said four of the company's power traders -- Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith -- have 30 days to show why they should not be assessed a total of $18 million in civil penalties."
The trades led to a profit of $35 million; the Federal Energy Regulatory Commission demands a fine equal to the ill-gottne profit (with interest) plus $435 million in civil penalties.
"Scary stuff," said one senior executive at a trading firm. "Which I guess is the point."
Now it is about manipulating California electricity markets.
Interestingly enough, the accusations now come with teeth:
"The FERC also said four of the company's power traders -- Daniel Brin, Scott Connelly, Karen Levine, and Ryan Smith -- have 30 days to show why they should not be assessed a total of $18 million in civil penalties."
The trades led to a profit of $35 million; the Federal Energy Regulatory Commission demands a fine equal to the ill-gottne profit (with interest) plus $435 million in civil penalties.
"Scary stuff," said one senior executive at a trading firm. "Which I guess is the point."
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