2013-58 Record unemployment in Europe

19.5 million people looking for a job and not finding it.
Unemployment rate  12.2%, over 25% in Spain and in Greece
Youth unemployment: over 55% in Spain and in Greece

2013-57 Now about the problems with inflation

If the inflation was raised, as Ken Rogoff suggests:

• the FED may lose control of inflation
• as inflation accelerates, any benefits will be swamped by "disruptive consequences of people spending money as soon as possible
• Inflation punishes people on fixed incomes
• It discourages lending and investment, slowing economic growth in the future

2013-56 Deflation in Europe

We have just talked about the possible (if doubtful) benefits of inflation. Here is an article about deflation in Europe
I am not sure you can read it - access may be restricted to subscribers - so here is a summary.
1. After underperforming for a long time, the Euro-area economy starts growing. But unemployment is high "And now, the single-currency club faces a more dangerous health risk stemming from fiscal consolidation, a surprisingly strong euro, excess capacity and tight credit conditions: economy-crippling deflation."

2. Inflation in the area is below 1%, the lowest level since 2008. Prices have been falling in France, Italy and Spain. Even in Germany it is only 1.6%.

3. So the ECB can safely stimulate the economy, without the danger of inflation.

4. If Europe falls into deflation, the cost of servicing debts will "rise dramatically". Italy in particular will be in trouble. According to one estimate, to keep the debt/GDP ratio constant, it needs to increase its surplus by more than 1% for each % decrease in inflation

5. What is at fault? Austerity

2013-55 OMG!

Inflation is the solution for economic troubles???????????????????????

This is a long and interesting article about the benefit of inflating our way out of the trouble.
The issue is important as the cornerstone of monetary policy in the last 20 years was a low and stable rate of inflation.
I would like to talk about it for a few lectures.
Here is the first fragment to discuss.

"Rising prices help companies increase profits;"
Correct or not?
"Rising wages help borrowers repay debts."
 Correct or not?
" Inflation also encourages people and businesses to borrow money and spend it more quickly. "

"The school board in Anchorage, Alaska, for example, is counting on inflation to keep a lid on teachers’ wages. Retailers including Costco and Walmart are hoping for higher inflation to increase profits. The federal government expects inflation to ease the burden of its debts."

Are they right?

Answers will come after we talk about it. It will be an excellent review of a few topics from the course.

2013-54 On currency investors

In today's Financial Post there is an article about currency investing. Basically, some people are worried that the US dollar will fall because of political problems  in the US. These people buy the Chinese yuan or baskets of currencies that are resource-linked: the Australian, Canadian and New Zealand dollar as well as the South African Rand.
The total amount of such investments is, however, relatively small.
The article mentions something we have been studying: investing in foreign currencies because of high return. One bank is offering 5.75% on the Brazilian real. But remember that for the investment to be profitable, the real cannot depreciate too much.

2013-53 On inflation and inflation statistics

Because of the weakness of the Canadian economy, inflation has been low


In an interesting article that you should read, the author discusses whether Statistics Canada inflation numbers can be believed.

I will summarize his main points:
1. People he knows complain that, in their opinion, inflation is higher than the 1-2% reported by Statistics Canada
2. Indeed, he says, several items increase in price at a higher rate: food, transportation, child care and, regrettably for you,  tuition fees (21% increase in the last 5 years);
3. Inflation is not the same for everyone. It is higher for necessities (food) than for more expensive items (electronics, cars). This exacerbates concerns about income inequality.
4. The best approach is to keep Statistics Canada independent; otherwise people will not believe its statistics.

Note point 3. The first part is trivial, of course. If you are a student with child care needs, you are facing big increases in the cost of living; if you are buy a lot of women's clothing and electronic equipment, you are enjoying deflation.
But the second part raises an important issue. Productivity growth is faster for manufactured goods than for foodstuffs. So, over time, poor families face rising relative prices.

2031-52 Baseball playoffs

Democrats win with a punt.
There is an agreement in the US to reopen the government until January 15, and extend the borrowing limit until February. In the meantime there will be discussions on how to fix long-term fiscal problems.

And the markets: they are doing their own thing

2013-51 Balanced budget

In the speech from the throne, the government promised balanced budget in normal times. In a recession, they would allow a deficit but with a detailed plan on when the deficit will be eliminated.
It is an interesting idea. Much better than proposals to have a balanced budget all the time.
But there are not enough details to evaluate it.

2013-50 Housing bubble in the UK

an interesting article on the UK repeating what happened in Canada in the Great Recession
Mark Carney, when he was the Governor of the Bank of Canada, was concerned about housing debt.
Now, as the Governor of the Bank of England he has the same concerns, in the UK.

2013-49 According to Warren Buffet

who is the idiot?

But he reports no changes yet in consumer demand.

2013-48 The Federal Government is concerned

that Absolute Purchasing Power Parity does not hold between Canada and the U.S.
Prices of many goods and services are, at current exchange rate, higher in Canada than in the U.S.

They blame it on tariffs and noncompetitive behaviour.

2013-47 More on Nobel winners and markets

Various publications have been stressing that there are differences of opinion between two of the laureates, Eugene Fama and Robert Shiller

Fama is of the opinion that markets are rational and a monkey, picking stocks by throwing darts at stock market listings, would do as well as a a professional money manager. Shiller thinks that  this is not true and that there are bubbles in the stock market (as well as in the housing market) caused by irrational behaviour of investors. In his view, share prices tend to the average price/earning ratio, and house prices to the long-run average proportion of income.

Shiller has a persuasive graph showing that prices return to long-run averages.


Here is an article from 2005 about Shiller's prediction that house prices in the US will fall

2013-46 The Yellen Fed? Precise and Predictable

The Yellen Fed? Precise and Predictable

The New York Times prediction on how Janet Yellen will run the US moetary policy is something you should read.
Here is what they stress:

"[...]in public speeches and academic work, she has suggested that the Fed should be more systematic, predictable and transparent — in short, that it should lay down some rules and stick to them. It is a template that Wall Street likes, and one that underscores the Fed’s departure from the days of Alan Greenspan, its chairman from 1987 to 2006, whose Delphic pronouncements were endlessly parsed by economists and investors." 

She is all for transparency and relatively simple rules.

Note the difference between decision-making at the White house and at the FED, stressed at the end of the article:

“The Fed meets every six weeks and makes usually one big decision after careful forethought and research,” the colleague said. “The White House meets every day and has 18 million things to deal with.” 

So a careful, deliberate approach is what is needed at the central bank.

In case you do not know what Delphic means, check out this download:

http://curiyo.com/

It installs as an add on to your browser and allows you to find things quickly.

Oops, it does not work on the blog, for some reason. But it works on many other sites

2013-45 Summers on the fiscal problem

Ok, so perhaps the US fiscal problem will be resolved on Tuesday, perhaps not.
It got boring by now. It looks like the best we can hope for is a temporary fix. So, for a fresh perspective, here is a comment by Larry Summers , former US Treasury secretary and former President of Harvard, who looks beyond the budget impasse.

The current fight is about the cuts to government spending as projections of future debt are dire. Summers makes a couple of interesting points:

• "Projections that there will be a major deficit problem are highly uncertain"

He points out that the same people who are very concerned about deficit and debt are not concerned about global warming, claiming insufficient evidence global warming is a problem. Well, there is much more evidence about global warming than about dire US fiscal future.

• "Data from the CBO (Congressional Budget Office, a non-partisan institution) imply that an increase of just .2 percent in annual growth would entirely eliminate the projected long-term budget gap."

So politicians should worry about growth, not deficits.

2013-44 And the Nobel Prize goes to

three academic researchers who studied the determination of stock prices.
Eugene Fama (Chicago) developed the theory of efficient markets. According to the theory, share prices are set on the basis of all available information that is rationally included by market participants. What this means is that, in the short run, prices are unpredictable, there are no unexplored market opportunities and it is not possible to regularly produce returns higher returns than the market. Hence index funds.
Lars Peter Hansen (Chicago) developed econometric techniques, originally used to test theories of market pricing but nowadays used in many different areas of economics.
Robert Shiller (Yale) showed that, over longer periods, there are predictable movements in share prices. He wrote a book "Irrational Exuberance" during the internet share price boom, arguing that shares are overpriced. And he was right.

2013-43 Our top man is confident, IMF less so

The minister of finance, Jim Flaherty, is confident the US will resolve the debt ceiling problem
This article lists important announcements in the next few weeks.
October 16: "Mr. Flaherty is expected to deliver his fiscal update — a recalibrating of economic growth and revenue projections — some time after the Speech from the Throne on Oct. 16."
October 23: Bank of Canada Monetary Policy Report. Here is the link to previous reports

The IMF published its bi-annual World Economic Outlook (WOE) 
Here is the summary

"Global growth is in low gear, and the drivers of activity are changing. These dynamics raise new policy challenges. Advanced economies are growing again but must continue financial sector repair, pursue fiscal consolidation, and spur job growth. Emerging market economies face the dual challenges of slowing growth and tighter global financial conditions."

Here is the summary for Canada

"The Canadian economy grew at an annual rate of 1¾ percent in the first half of 2013, driven by a rebound in the export and energy sectors, as well as private consumption. The economy is projected to expand at slightly more than 1½ percent in 2013 and 2¼ percent in 2014, as net exports and business investment benefit from the U.S. recovery and more than offset slower consumption growth. The balance of risks to Canada’s outlook is still tilted to the downside, emanating from potentially weaker external demand. Moreover, household debt remains historically high, which could amplify the negative growth impact of adverse shocks to the economy. Policies need to continue to support near-term growth while reducing domestic vulnerabilities. Fiscal consolidation, particularly at the provincial level, must proceed as planned to rebuild fiscal space against future shocks. The current accommodative monetary policy stance remains appropriate, with gradual tightening expected to begin in the second half of 2014."

 

2013-42 Janet Yellen to lead the FED

Janet Yellen is to be nominated as the new FED chief
She is currently the deputy chair of the FED, was the presedent of the San Francisco Fed and a professor at Berkley. Her biggest contribution in economics is the efficiency wage theory, which she developed with her husband, Nobel Prize winner George Akerlof.
The Wall Street Journal analyzed economic forecasts  by FED policymakers over 2009-2012. She came first
If confirmed (very likely) she will be the most powerful woman in economics and finance.

Here is the best summary of how she may be different from her predecessor: comment made by Derek Holt, Dov Zigler, Bank of Nova Scotia (from the Globe and Mail)

“Yellen has been a fairly consistent advocate that the Fed cannot ignore the ‘full employment’ component of its dual mandate. Over the past number of years, Yellen has tended to speak directly and bluntly about the FOMC’s responsibility to pursue an accommodative monetary policy in order to try and encourage full employment in the economy."

2013-41 Our trade deficit

For a year and a half, Canada had a trade deficit
Why? Relatively strong economy. A part of all spending is on imports; if spending increases, so do imports.
Also, the Canadian dollar is overvalued, making Canadian goods expensive relative to foreign goods.
We have a big surplus with the United States ($4 billion) and a big deficit with the rest of the world ($5.3 billion). Note that three quarters of our exports go to the U.S.

2013-40 IMF says the U.S is a problem

IMF head warns US debt crisis threatens world economy
There is a graphic in the article showing US debt and increases in the debt limit.
Ms. Lagarde says it is critical that US
1. fixes its current problem
2. does not cut too much in order not to derail the recovery.
Also, she says the world economy is doing find

2013-39 The sky is falling! But do not look up

No agreement so far on the budget; and the House Speaker threatens default (see any paper today).
The markets fell, but not a lot: between 0.25% and 1%.
Market volatility increased, but is still not very high.
So we will see what happens.

2013-38 How we define exchange rates

The exchange rate is the price of one currency in terms of a foreign currency.
As in:

• the exchange rate of the Kuwaiti dollar in terms of the Vietnamese dong (KWDVND=X) is almost 75000 of dongs for one dollar.
• the exchange rate of the Chilean peso in terms of the Canadian dollar (CLPCAD=X) is about 2/10th of a cent for one peso
• the exchange rate of the Canadian dollar in terms of the Chilean peso (CADCLP=X) - well, check it yourself or see the previous posting.

2013-37 How to check exchange rates

We will be talking about the exchange rates today. Here is how to check them.
1. Find out the symbols for currencies from the Oanda website
2. go to yahoo finance and enter the two currencies as in, for example:
CADUSD
This gives you the price of one Canadian dollar in US dollars, or the exchange rate of the Canadian dollar in terms of the US dollar.
More examples: 
The exchange rate in terms of  the Euro
The exchange rate in terms of the Chilean peso
The exchange rate in terms of the Vietnamese dong
The exchange rate in terms of the Kuwaiti dinar


3. If you want historical information, Oanda.com is a great resource

2013-36 CIBC's mortgages are insured

The CIBC has a fast growing mortgage business. After the Great Recession and its aftermath, this raises concerns about what can happen if the economy gets worse and borrower default rises.

No worries, says the CIBC. Our mortgages are insured. If borrowers default, we get the insurance payments.

This comment shows that Canadian banks learned a lesson from the Great Recession in the U.S.

A couple of comments:
1. So who will pay the insurance? You, that is who. Mortgages are insured with the Canada Mortgage and Housing Corporation (CMHC), a government entity. Banks pay for insurance so it should be ok, unless things get very bad.
Note, however, that CHMC is earning a profit. So we get a profit, and a tail risk.
2. The problem during the Great Recession was adverse selection and lower lending standards. This is a bank-centered article and it does not say a word about whether CIBC is maintaining high lending standards.

2013-35 But things are looking better

While unemployment in Spain is still unbelievably high as you saw in the previous post, things are getting better in Europe

This article is a good example of how you take a pulse of the economy.

1. Retail sales have been increasing (0.7% this month, 0.5% last month)
Consumption is, in most countries, more than 50% of the GDP. When consumers are buying, the economy is growing.

But you have to be careful because, as the article mentions, an unknown part of the increase in consumption was because sales in Portugal and Spain increased a lot, perhaps due to tourism sector rebounding.

Note: the numbers just published are for August. Information comes with a delay. In this case the delay is very short - just a month.

2. Survey of economic activity.
Purchasing manager index - a survey of firms - is above 50. This means that more than half of the managers reported that conditions are better than in the previous month. Purchasing managers are asked about output, new orders, employment and other issues. The answers are coded as: 1 - things are improving; 0.5 - no change, 0 - things are getting worse. The calculated value is a weighted index of answers.
Three things to note:
- purchasing managers are the first to know
- they are asked non-specific questions, so the are likely to answer. No trade secrets are revealed
- the questions are about fact, not opinions

3. Number of unemployed has been falling, third month in a row

2013-34 So how bad is it in Spain

Quite bad.
Unemployment is 26.3%, down from a record of 27.2%.
And youth unemployment (your age) is about twice higher.

2013-33 Shutdown and Canada

Here is a summary form the Globe and Mail and from the National Post

The exact rules of the shutdown are not set in stone. So it is not clear whether there will be any delays on the border.

The markets have already incorporated the shutdown into share prices, so do not expect much reaction. But, as another example of political issues in the US, in the medium run share prices are likely to be lower than they would have been otherwise.

There will likely be little effect on the economy. If the shutdown drags on for more than a couple of weeks, growth in the US will slow; with minor negative effects on our economy.

The big one will come around October 17, when the debt limit will become binding and the US government will not be legally allowed to borrow new money. Perhaps the politicians will come to an agreement by then.

2013-32 Shutdown indeed.

As there was no last moment agreement on funding the U.S. Federal Government, the shutdown started.

What happened?

• The budget has not been approved on time 

How it unfolded? 

• The New York Times provides a useful graphic 

How will it work (or rather - not work)?

• The US government will continue to operate; but only with essential workers
• Non-essential workers will be furloughed. What is a furlough? It is a temporary unpaid leave leave caused by demands of the employer. Most other workers may be unpaid, for the duration of the shutdown, but will be paid afterwards.
• Military personnel will be paid.

The New York Times provides another useful graphics 

Mechanism:

US has an unusual system of government in that the legislative and executive branches are separately elected. In Canada, certain legislation (including on the budget, as is now the case in the US) are automatically votes of confidence in the government. If such a vote fails, the government resigns and a new election is held. Parliamentary majority is usually sufficient, because of party discipline; under a minority government, the governing party needs support from other party or parties to pass legislation.

How is US budget resolution approved?

The House and the Senate need to agree on the resolution, and the president needs to sign it. If the president vetoes the resolution, the House and Senate can override it with a 2/3 of the vote.

In this case, the House and the Senate did not agree.

Why the shutdown?

The Republicans, who have majority in the House of Representatives, tried to impose conditions on the budget resolution. The Senate rejected the conditions.

While one of the conditions involved approval of the Keystone XL pipeline from Alberta to the Gulf-area refineries, the main issue is the Affordable Care Act, or Obamacare. The Republicans are dead set against it; the House held around 43 votes rejecting it.

More details are here

So who is right?

This is politics, but with economic consequences. Here is a comment from robertreich.org:

"[...] the only settled way we know what the American people want is through the democratic process. And the Affordable Care Act (Obamacare) is the law of the land. A majority of the House and Senate voted for it, the President signed it into law, its constitutionality has been upheld by the Supreme Court, and a majority  of Americans reelected the President after an election battle in which the Affordable Care Act was a central issue."

So this is about the Republican party achieving goals by means beyond the normal constitutional system.