2018-21 Cryptocurrencies are declining in value

This CNBC article from a few days ago discusses the decline in the price of cryptocurrencies: 80% below the peak at the beginning of the year. It also mentions the issue with a cryptocurrency called tether. The promise of tether is that the issues hold equal amount of US dollars as backing so that one tether is worth one US dollar. The problem is that there has been no independent audit of the company and it is not clear they indeed hold the amount in US dollars they claim. Furthermore, it seems that large quantities of tether were exchanged at various time for bitcoin and there is suspission that this involved price manipulation.

The article summarizes two problems with cryptocurrencies: a) their value is unstable, b) and their setup is opaque.

ad a) the value of crytocurrencies is very unstable, and so it is not useful to buy goods and services. For example, an item that cost 1 bitcoin in January costs now 5 bitcoins. That is the rate of currency depreciation faster than any this year. 

ad b) there is a lot of fraud, or suspected fraud in the cryptocurrency markets. In contrast, there is no fraud with regular currencies. Furthermore, their value is quite stable: as we have seen, over 100 years on the average the Canadian dollar lost 3% per year; in the last 20 years the loss was between 1% and 3% per year, and close to 2% per year.

Unless these, and other problems, are resolved, cryptocurrencies are not going to replace actual currencies.

2018-20 Imperfect inflation target may need overhaul: Bank of Canada

According to Carolyn Wilkins, the Senior Deputy Governor of the Bank of Canada and Laurier BA in economics gradate, the inflation targeting framework is going to be revised
The Bank is considering a few options

• setting a higher target at time of economic stress
• longer-range inflation target
• shifting to targeting growth
• introducing dual mandate: targeting both inflation and GDP growth or employment.

Problem: in the current environment of low interest rates, the Bank may not have enough room to maneuver if the next recession hits. Before the Great Recession the policy rate was 4.25%; now it is only 1.75%.

Additional tools of monetary policy:

• negative interest rates
• purchasing long-term assets.

The second approach is called quantitative easing. It raises the price of long-term assets and lowers long-term interest rates.

In preparation for the renewal of the Bank framework in 2021, the Bank will look at alternative approaches and will try to see if any are better.

 

2018-19 China Rules

There is a cycle of articles in the New York Times on the growth of China. Today's article shows how fast it grew, and makes a point that the US dream: becoming well of even when born poor - is more likely in China than in the US.
The comparisons below use exchange rates. If we used PPP exchange rates, the picture would be a bit different

Income per capita, PPP exchange rates
US:     $59 500
China: $16 700
Income per capita, Nominal exchange rates
US:     $59500
China  $  8800

Where we stand with the Chinese opportunity:
Proportion of exports: biggest customer and China
Canada           US 77%, China 4.3%
Finland Germany 14%, China 5.7%
Australia:  China 33.5%
Germany:        US 8.8%, China 6.8%
UK:              US 13.2%, China 4.8%
US:        Canada 18.3%, China 8.4%

2018-18 Past performance is no guarantee of future results

Yesterday there was a mid-term election in the US.
I do not know how it ended when I am writing this, but it does not matter about what follows.
When people look at stock markets, they try to learn from history. Here is an interesting bit
Following every mid-term election since WWII, stock prices went up, a lot:
"The numbers tell the story. Since 1946, in years with midterm elections, the Standard & Poor’s 500-stock index has gained a median of 18.4 percent in the nine-month period from Sept. 30, just ahead of voting, through June 30 of the following year, according to data compiled by Ned Davis Research. In that same period in nonvoting years, the index gained 4.9 percent."

Check at the end of June if this happened again.

2018-17 Unemployment

An excellent, and timely, article appeared in Friday's Wall Street Journal. It covers our discussion of the labour market in chapter 7 and unemployment in chapter 8. I am not sure if you can access it, so here is a fairly detailed summary
1.  "Strong hiring and low unemployment are delivering U.S. workers their best pay raises in nearly a decade."
High demand, low supply = increase in the real wage.

What happened last month? Employment increased by 250 000 - while only 188 000 was expected. Nominal wages increased by 3.1%, and unemployment remained unchanged at 3.7%.

Why did employment increase but unemployment did not fall?

An economists remarked that more people join the labour market as wages rise. Indeed, labour force participation is the highest since 2010. It is still lower than before the Great Recession. It is not clear whether decline in labour force participation is permanent.

Is the increase of unemployment just that? Not necessarily. In September hurricane Florence hit, and hiring in September was weak. So it may be that some of the jobs increase is delayed hiring from September.

Low - skilled workers seem to benefit from the strong labour market. Since 2010:

- weakly wages for high school dropouts increased 23.4%

- wage growth for college graduates was 14.4%

Ok, so are workers better off?

Nominal wages do not tell you enough. We need to compare it with the inflation rate.

Inflation this year is around 2%. So this year real wages increased by over 1%

The increase in prices (you can calculate it from data here between January 1, 2010 and January 1, 2017 was 14.2%. Adding the inflation since January 2017 we can conclude that while real wages of high-school dropouts have increased, those of college graduates fell.

Why is the labour market in such a good shape? According to Nomura Securities, it is because of fiscal stimulus: tax cuts introduced last year. Nomura expects hiring to slow down in the future.

The strong labour market leads to expectations of interest rate increases by the FED. We will talk about it in a couple of weeks.

But wage growth is slow compared to a similar period of low inflation in early 2000s and late 1960s. Reason: perhaps slow productivity growth.

2018-16. Poor TSX

TSX is at the same level it was 10 years and a few months ago (before the Great Recession. Lost decade in Canadian shares.
Why? Big weight in resources, the prices of which did not do well, and limited number of tech stocks, which did well int he last 10 years.

2018-15. Canadians prefer elimination of deficit, government does otherwise

In an opinion  poll 1000 Canadians were asked whether they preferred elimination of deficit or having a deficit to invest in government programs. 
58% wanted the budget balanced
33% wanted deficit to invest in government programs
But we will have a deficit. During the last election the government was promising deficits no higher than $10 billion a year and a surplus in 2019. But last year and this the deficits are around $19 billion and are projected to increase to over $21 billion in 2019-20.
So what gives? Governments know that when people are asked, in the abstract, if they want a balanced budget, they say yes. But when things become specific, for example the program they like is to be cut, they are against it.
And the second reason is voting. Young people would pay for current deficits, so they are, presumably, against them. Old people benefit from deficits, because they are getting government programs without paying the full bill. And, as I said many times, a smaller proportion of young people vote.

2018-14 Milton campus will not happen

WLU has been trying for years to open a new campus in Milton. The last government finally agreed to finance the new campus; but the new government has cancelled the funding. Reason - fiscal restraint.

2018-13 Carbon tax

The federal government is introducing a carbon tax. The goal is environmental. Emission of carbon will be taxed, starting at $20 per ton and increasing $10 per year. The revenue from the tax will be returned to households at tax time. The effect is to raise the price of carbon, with limited cost to the population.

2018-12 On Wednesday Bank of Canada is expected to increase the interest rate

On October 24 Bank of Canada is announcing its interest rate decision. It is expected to raise the interest rate, even though the most recent economic data were weak: inflation fell and so did retail sales. To a large extent, the declines were caused by lower prices of gasoline. As we will discuss in due course, the Bank of Canada does not pay much attention to the prices of gasoline because these are volatile and change all the time. It focuses more on the general state of the economy which is booming, and on the inflation rate, which is above target.
By the way, so it happens that only one Bank of Canada interest decision will coincide with the course. The Bank of Canada makes decisions once every 6 weeks; the next one will be right after we finish. So read reports about this one.

2018-11 US president attacks the central bank

Donald Trump yet again attacked the Federal Reserve, US central bank, for raising interest rates.
What is happening? With record low unemployment, fast growth and inflation above 2% the FED hs been increasing interest rates. That is to be expected when the economy is so strong and interest rates so low. But higher interest rates will slow down economic growth and so Trump criticizes the FED.
The FED is, in principle, independent. The president, who nominates FED chair and board members, can dismiss them but only for cause. In general it is believed that a policy disagreement is not sufficient to dismiss a board member.
So the criticism is unlikely to have much of an effect.
In contrast to the FED, the Federal Government can force the Governor of the Bank of Canada to resign in case of a fundamental policy disagreement. It would issue a directive, ordering the Governor to adopt a particular policy. It is believed that the Governor will then implement the policy and resign. This has never happened.

2018-10 Trade agreement signed

The power of a deadline! 2 hours before the deadline the deal was signed. The best source of details is the Guardian

2018-09 Nafta saga so far

In this article,  the Globe and Mail provides a detailed summary of the issues related to NAFTA.  Read it if you are interested - it is too long to summarize.
A few important points:
- Canada is much more dependent on NAFTA trade than the US (obviously); only two US states (Vermont and Michigan) export more than 10% of theri output to Canada; all Canadian provinces export more than 10% of output to the US;
- but: Canada is number 1 trading partner of 35 US states; number 2 for most of the remaining states
- the contentous issues are the dairy protection, dispute settlement and, the Globe article adds, the softwood lumber issue, that has been a thorn in US-Canada relations for a long time.

2018-08 The fate of NAFTA

Nafta, the North American Free Trade Agreement, is being renegotiated. The renegotiation was demanded by the US, which complained that it caused US jobs go to low-wager Mexico.
The US has now concluded a new agreement with Mexico. It has to be signed by the end of the month. Canada-US negotiations are continuing. On Tuesday, the US trade representative said that even after the deal with Mexico is signed, the negotiations with Canada can continue.
There are two main points of disagreement:
1. dispute resolution mechanism. In US opinion, disputes should be dealt with by domestic courts. Canada wants to keep it. Being much smaller, the dispute resolution mechanism provides some way of countering disagreements with the US.
2. Dairy protection in Canada. US wants greater access to Canadian dairy market.
Canada has repeatedly stated that it rather leaves NAFTA than accept a bad deal.
We will see how it ends

2018-08 Government statistics

Ontario deficit at $15-billion, not previous government’s $6.7-billion forecast, say PCs
As I mentioned several times in class, you do not want the government to produce statistics which may put it in bad/good light. Here is an example. The previous Ontario government claimed deficit this year of $6.7 billion. The current government claims it is $15 billion. Of course the previous government wanted to show its finances in the best light. The current government wants to show it in the worst light. There are two reasons

• to show how bad the previous government was
• to be able to achieve rapid improvement and show how good it is

Note that what I wrote does not specify political parties. The same will likely happen when  the current ruling party loses an election.

The solution: independent statistical office.

2018-07 Inflation eases but core measures signal higher interest rates

The rate of inflation in July was 2.8%, a decline from 3% in June. 
Inflation is so high because of an increase in gasoline costs, which rose 20%. Excluding gasoline, inflation remained constant at 2.2%.
Recall that the goal of the Bank of Canada is to maintain inflation close to 2%. But their approach is to look at core inflation: inflation without the most volatile elements, in particular fuel.  Last month shows that this is the right approach. Rising prices of fuels do not indicate inflationary pressures in the economy. Prices of gasoline change all the time and there is no point of having monetary policy dictated by gasoline prices.

2018-06 Trade War!

Since our last class, the US imposed 10% tariffs on $200 billion of Chinese imports, and China retaliated by imposing tariffs on $60 billion of US imports, This is the second round of tariffs; in the first round both countries imposed tariffs on $50 billion of imports.
What is going on? US have been for a long time complaining about Chinese unfair trade practices. They involve forced technology transfers in joint ventures, various obstacles to trade and, some time ago, an undervalued currency. The US has a large trade deficit with China: exports are $130 billion and imports are $505 billion. This explains why Chinese retaliatory tariffs are on a smaller volume of trade: there is just not enough imports from the US.
What do tariffs do? Exporting firms can either reduce margins, or raise prices, or use a combination of both. For Chinese firms, raising prices is likely as they are very competitive and operate with low margins. They can also try to move production to another country, and there has been talk about Chinese assembly plants moving to Vietnam and Thailand. But moving production would take time, while the tariffs may be removed if an agreement is reached. So in the short run you can expect prices of products imported from China to rise. Note that US announced that if there is no change by January 1, tariffs increase to 25%; they are also threatening imposing tariffs on, essentially, all imports from China.
Needless to say, this is unprecedented. US and China are the two biggest economies in the world. 

How will it all end? It is difficult to say. US has the advantage because its imports from China are so large (four times bigger than exports). But China is not a democracy, and the government is able to tolerate more damage to the economy from the trade war, while the US government will be under pressure from both importers (Walmart!) and exporters (farmers, car companies). And there is an election in 50 days.

2018-05 Ten years since the Great Recession began

The Great Recession began September 15, 2008. This article provides a great summary of what happened in the Canadian economy since.
The article stresses that the crisis was painful:
- stock markets lost half of their value
- North American car industry (GM and Chrysler) needed government support
- unemployment increased by 500 000 in Canada and 6 million in the US
But it also stresses that, as we discuss, fiscal and monetary policies saved the world from a collapse of the financial system and the second Great Depression.
But the crisis has had long-term consequences:

• slow growth. In Canada

1997-2007: 3% per year

2009-2017: 1.7% per year

World growth also slowed down, from 3.3% to 2.9%.

Recoveries are slow after a financial recession

• Firms are now much more cautious than before the crisis, and even though profits recovered, investment is low
• Commodity prices fell during the recession and for many commodities, prices did not recover
• Low interest rates led to increase in asset prices, raising inequality
• Low interest rates lead to increased risk-taking in financial markets; a lot of corporate bonds are low-rated

Biggest problem:

• Rising debt around the world, in particular in Canada. Not a surprise: interest rates are at record low.

source: tradingeconomics.com

When interest rates rise, households and firms may have problems servicing the debt.

The Canadian economy has not performed as well as the US economy over the last 10 years:

2018-04 The effect of US tax cuts

Last year a large tax cut took place in the US. In particular, the corporate tax rate was reduced from 35% - one of the highest in developed countries, to 21%, closer to the average (he data on tax rates are here. This is much closer to the rate in Canada (15%) and so reduces the incentive for investment in Canada.
A report to be released today by PwC warns that, as a result, "the U.S. tax changes put 635,000 Canadian jobs at risk and could potentially reduce Canada’s GDP by $85-billion, representing 4.9 per cent of the Canadian economy", according to an article by the Globe and Mail.
That strikes me as a huge exaggeration. The effect on the US economy is estimated to be between 0.3 and 0.9% of GDP. But, in any case, it shows the importance of the economic links between Canada and the US. No wonder the NAFTA negotiations are crucial to the Canadian economy

2018-03 Warren Buffett on the 2008 crisis

https://www.wsj.com/video/warren-buffett-explains-the-2008-financial-crisis/35156277-3523-4B2C-B783-3CA790CF20EC.html

2018-02 More on Argentina

So Argentina is a mess. Not the first time:

Search: How did Argentina pull off a 100-year bond sale?

The fragments below are  from the article (published in FT, June 20, 2017)

Argentina has defaulted on its sovereign debt eight times since independence in 1816, spectacularly so in 2001 on $100bn of bonds — at the time the world’s largest default — and most recently in 2014

A year ago future looked bright

[...]Mr Macri’s government “cured” the latest default in 2016, and times have changed, said Joe Harper, a partner at Explorador Capital Management, an investment fund focused on Latin America. “The policy pendulum in Argentina has shifted to the centre, and the country’s next 100 years will be very different than the last century.”

2018-01 Why we learn macroeconomics

To avoid this:  Argentina raises interest rates to 60% to shore up peso

So what is happening? Argentina is a mess. Bad governments, excessive money printing, years of inflation and repeated government bankruptcies have resulted in an economy that is not functioning well. As you can see in the article, the exchange rate of the peso was ARSUSD=0.056 at the beginning of the year (i.e. 5.6 US cents per peso; ARSUSD is the amount of US dollars per one Argentine peso) and now is ARSUSD=0.026. In other words, the peso lost a bit over half of its value. Alternatively speaking, the value of the US dollar in Peso has more than doubled, from USDARS=18 at the beginning of the year, to USDARS=39.

What is happening? As people expect the peso to lose value, they sell it on the foreign exchange market and buy US dollars. This makes the peso lose value (become cheaper, depreciate). To prevent this, the Argentine central bank raised interest rates, making holding peso more attractive. It did not work, with the slide in peso continuing.

Now imagine that you are running a business in Argentina. Borrowing in local currency is prohibitively expensive. Borrowing in dollars is risky: the local currency value of dollar loans has more than doubled in the last 8 months.

You can find the details of the article here:

https://www.theguardian.com/business/2018/aug/30/argentina-raises-interest-rates-to-60-to-shore-up-peso

You can check the current exchange rate here:
https://www.xe.com/currencyconverter/convert/?Amount=1&From=ARS&To=USD