One of the biggest issues in Canada is the boom in house prices, especially in Vancouver and in Toronto.
Why are prices going up? The main reason is low interest rates. The rate on a 5 - year discount mortgage is now 2.5%; it was 5% before the Great Recession. Mortgage payment is the same on a loan 30% higher when the interest rate is 2.5% rather than 5%. And of course, as house prices go up, people rush into the market.
Why is this a problem? Because, eventually, interest rates will goup and the housing market may crash.
Also, with baby boomers starting to downsize, the demand for housing may start to fall.
Tuesday 24 November 2015
Sunday 22 November 2015
2015-19 Monetary policy in Europe
Monetary policy in Europe is facing problems which, until the Great Recession, did not really exist.
1. Inflation is too low
2. Interest rates on bank reserves are negative
3. Money supply increase is unprecedented
The head of the ECB, Mario Draghi, said on Friday that the economic situation warrants further monetary easing.
With interest rates on reserves already negative, the ECB may increase its quantitative easing program. In recent months the ECB has been buying 60 billion euro a month of mostly government bonds. It seems it is not enough; inflation in the Eurozone last month was 0.1%. The ECB target is inflation of just under 2%.
In the past, central banks worried about inflation being too high. Now they have two worries
1. Inflation is too low
2. It is hard to raise the inflation rate.
What is the problem with low inflation? Inflation expectations are also low, limiting how much the real interest rate can be reduced
1. Inflation is too low
2. Interest rates on bank reserves are negative
3. Money supply increase is unprecedented
The head of the ECB, Mario Draghi, said on Friday that the economic situation warrants further monetary easing.
With interest rates on reserves already negative, the ECB may increase its quantitative easing program. In recent months the ECB has been buying 60 billion euro a month of mostly government bonds. It seems it is not enough; inflation in the Eurozone last month was 0.1%. The ECB target is inflation of just under 2%.
In the past, central banks worried about inflation being too high. Now they have two worries
1. Inflation is too low
2. It is hard to raise the inflation rate.
What is the problem with low inflation? Inflation expectations are also low, limiting how much the real interest rate can be reduced
Tuesday 17 November 2015
2015-18 Why we talk so much about monetary policy, and other monetary policy issues
As you have noticed, i mention monetary policy a lot. This is because it is the only game in town. In this article the author simply says:
Eurozone economic growth eases despite low oil prices; central bank under pressure to do more
Not a word about fiscal policy. With debts much higher now than before the Great Recession, there is little scope for fiscal policy.
In the second article the FED chair, Janet Yellen, stresses the need to evaluate new approaches to monetary policy that were introduced in the Great Recession. We will be talking about these approaches today. Bottom line: we are not sure how well they work. Monetary policy is hard.
The third article discusses Yellen's opposition to a proposal by some politicians that monetary policy should be run by an inflexible rule (we will discuss the benefits and problems of using a rule today or in the next lecture and see an example of such rule in chapter 14). She has three arguments:
1. Such rule would be too inflexible and would not allow the FED to react to events
2. Politicians do not have sufficient knowledge to design a good rule
3. Such rule would undermine central bank independence.
Sunday 15 November 2015
2015-17 Economic effects of terrorist attacks
Economists predict a weaker economy in France, but no major effect in the medium or long term.
Tourism may fall. France is the biggest tourist destination in the world, so it may have an effect on France. People will go to restaurants less and may be less likely to spend lavishly for Christmas.
The effect on the stock market will likely be minor, if any, as the attacks happened on Friday after markets close in Europe, providing traders sufficient time to figure out what to do. Perhaps there will be some panic selling by retail investors, but large investors will use the opportunity to buy.
There were two major attacks in Europe before: in Spain in 2004 and in London in 2005.In neither case were there significant effects on the respective economies; both Spain and London are major tourist destinations.
On the other hand, the 9-11 attack had a significant effect on the US economy.
Tourism may fall. France is the biggest tourist destination in the world, so it may have an effect on France. People will go to restaurants less and may be less likely to spend lavishly for Christmas.
The effect on the stock market will likely be minor, if any, as the attacks happened on Friday after markets close in Europe, providing traders sufficient time to figure out what to do. Perhaps there will be some panic selling by retail investors, but large investors will use the opportunity to buy.
There were two major attacks in Europe before: in Spain in 2004 and in London in 2005.In neither case were there significant effects on the respective economies; both Spain and London are major tourist destinations.
On the other hand, the 9-11 attack had a significant effect on the US economy.
Saturday 7 November 2015
2015-16 Job market reports, monetary policy and expectations
Last week there were new job market reports in both Canada and the US. In Canada, the number of new jobs was 44 000, of which 32 000 was in the public sector, likely people hired to help with the federal election. The private economy employment increased by 12 000, in line with expectations. Employment in Alberta fell (those low oil prices) while employment in Ontario and BC increased.
The US job market report was, potentially, of more consequence. This is because everyone is speculating whether the US central bank will raise interest rates in December. US non-farm employment increased by almost 300 000, the highest amount since last December. Unemployment fell to 5%.
As the FED has a dual mandate (it wants low inflation and low unemployment), trades expect the short-term interest rates to be raised in December. This means other interest rates increase right away, and prices of bonds fall.
What are the consequences? As interest rates in the US rise, the US dollar appreciates (this is the interest-rate parity). The price of oil in dollars falls since the price is in US dollars and appreciation of the US dollar raises the cost of oil in other currencies.
Note there are a couple of errors in the article.
The first: The euro fell to $1.708 , its lowest since April, and last traded down 1.31 percent at $1.0738 (should be 1.0708 - a big difference)
The second: average hourly earnings rose a respectable 9 cents (I have no idea what this should be)
So you should verify numbers you see, even from respectable sources (this one is from Reuters)..
The US job market report was, potentially, of more consequence. This is because everyone is speculating whether the US central bank will raise interest rates in December. US non-farm employment increased by almost 300 000, the highest amount since last December. Unemployment fell to 5%.
As the FED has a dual mandate (it wants low inflation and low unemployment), trades expect the short-term interest rates to be raised in December. This means other interest rates increase right away, and prices of bonds fall.
What are the consequences? As interest rates in the US rise, the US dollar appreciates (this is the interest-rate parity). The price of oil in dollars falls since the price is in US dollars and appreciation of the US dollar raises the cost of oil in other currencies.
Note there are a couple of errors in the article.
The first: The euro fell to $1.708 , its lowest since April, and last traded down 1.31 percent at $1.0738 (should be 1.0708 - a big difference)
The second: average hourly earnings rose a respectable 9 cents (I have no idea what this should be)
So you should verify numbers you see, even from respectable sources (this one is from Reuters)..
Tuesday 3 November 2015
2015-14 Global economy is weak
The global economy is weak. The weakness takes place despite the fact that
- the FED has not changed interest rate
- the Bank of Japan and the European Central Bank continue the policy of quantitative easing, i.e. buy various long-term assets to stimulate the economy
- the Chinese central bank recently reduced interest rates and reserve requirements.
Here is an amazing statistic:
"Appetite for safe assets is so strong in Europe that about 30 per cent of the $6.3 trillion of sovereign bonds in the euro area have negative yields, index data compiled by Bloomberg show. That means buyers who hold to maturity are willing to accept small losses in return for the promise that most of their money will be returned."
People are talking about the new normal, with low interest rares and low inflation rates.
Prices in Europe did not change in October after falling 0.1% in September. German exports are falling, and it looks like China will have the slowest growth in 25 years.
All this news suggests that the FED should wait with raising interest rates because demand is too weak to increase the inflation rate.
Sunday 1 November 2015
2015-13 US nearing full employment
According to a survey of economists, the US is approaching full employment.
The article provides a nice definition of full employment: "“Full employment” is a term economists use to signify an economy in balance: where there is no longer cyclical economic weakness, but also no pressures pushing the inflation rate ever higher. The term doesn't signify an economy in which everyone has a job, let alone a good one."
The unemployment rate in the US is 5.1%. During the Great recession it was 10%, so the decline since 2009 is 5%. In comparision, the unemployment rate in Canada during this period fell by less than 2%
Not everything is great, however. Participation rate, at 62.4% is the lowest since 1977, when a smaller proportion of women were in the labour force.
The participation rate has not been increasing. This is a surprise. Many economists thought the low participation rate following the Great Recession was due to discouraged workers, who would return to the labour force once the unemployment rate declines. But this has not happened.
One possible explanation is that more people retire before age 65 and that young people stay in school longer.
No wage increases. Another surprise is that wages remain flat despite the low unemployment rate. Some economists argue that wages will start to increase eventually; other point out to the increase in benefits.
The article provides a nice definition of full employment: "“Full employment” is a term economists use to signify an economy in balance: where there is no longer cyclical economic weakness, but also no pressures pushing the inflation rate ever higher. The term doesn't signify an economy in which everyone has a job, let alone a good one."
The unemployment rate in the US is 5.1%. During the Great recession it was 10%, so the decline since 2009 is 5%. In comparision, the unemployment rate in Canada during this period fell by less than 2%
Not everything is great, however. Participation rate, at 62.4% is the lowest since 1977, when a smaller proportion of women were in the labour force.
The participation rate has not been increasing. This is a surprise. Many economists thought the low participation rate following the Great Recession was due to discouraged workers, who would return to the labour force once the unemployment rate declines. But this has not happened.
One possible explanation is that more people retire before age 65 and that young people stay in school longer.
No wage increases. Another surprise is that wages remain flat despite the low unemployment rate. Some economists argue that wages will start to increase eventually; other point out to the increase in benefits.
Subscribe to:
Posts (Atom)