2019-28 The cost of storing cash

Earlier in the course we discuss the cost of storing cash. This article from the Guardian provides an estimate. It is about safety boxes for billionaires.

"The cheapest safety deposit box, which is just 5cm high, 16cm wide and 49cm deep, costs £600-a-year-to rent. That compares to £465 for a box twice the size in Harrods, and £240 in Metro Bank – the UK’s largest supplier of safety deposit boxes with 150,000 boxes across 70 branches."

You probably do not qualify so I am going to use the info on Metro Bank. 

1. A box twice the size of a box for billionaires would be 10cm by 16 cm by 50cm = 8000 cubic cm. It costs 240 pounds a year, or about USD 300
2.  So it would hold 8litres = 8kg of water
3.  Assume, generously, that paper money is four times lighter than water (nowadays banknotes are not flat). That means the box would hold 2 kg of banknotes
4.  A USD100 note weighs 1 gram. So this would be 2000 such notes, or $200 000

So the yearly cost of holding cash in a Metro Bank safety deposit box is $300/$200 000, or 0.15%

This limits how negative interest rates can become.

If you do qualify, here is the website:  https://www.internationalvaults.com/

It will cost you five times as much but they will pick you up in a Rolls Royce. And bigger boxes probably have lower prices per unit of volume.

2019-27 Another risk to watch

This Bloomberg article discussess the worries of central bankers about one important consequence of low interest policies: risky behaviour by investors (investors here are understood, as in common language,  as people who buy stocks and bonds. Recall that, in economics, this is not considered investment: it is just a change in ownership.  We define investors as people who build new factories, machines, office buildings etc).
What is the issue: with low interest rates around the world, people are searching for return, and put insufficient weight on risk. Here are a few quotes from the aticle:
"A prolonged period of low rates could also “spur reach-for-yield behavior, thereby increasing the vulnerability of the financial sector to subsequent shocks,” .
The ECB -- whose own benchmark rate is below zero -- highlighted threats to investment funds, insurers and in some real-estate markets. It also had a warning that mispriced assets could face corrections in future.
At Germany’s Bundesbank, which has long warned of the dangers of too-loose policy, Vice President Claudia Buch says there’s an “underestimation of credit risk.”"

2019-26 China is getting old

Please read the article in the Economist, posted in Readings as 2019-26 Old China

2019-25 Cryptocurrencies in China

Don't have much future. From the Economist: 

China’s central bank announced a new crackdown on cryptocurrencies in the country’s financial hub, Shanghai. The government had encouraged the development of blockchain technology. But the bank, which has ambitions to launch its own digital currency, warned that this should not be confused with the unregulated issuance of virtual currencies.

2019-24 The world economy is slowing down

From the Economist daily update:

The OECD predicted that the world economy would grow at just 2.9% this year, its weakest showing for over a decade. The club of mostly rich countries also forecast little improvement in growth over the next two years. It blamed, among other things, political uncertainty and the Sino-American trade war, and called for clearer climate-change policies. Note: OECD - the organization of Economic Cooperation and Development - is an international organization with 36 members; mostly developed countries but also some emerging economies. More information can be found here and here. It is an excellent source of economic data.

2019-23 Minimum wage

We have just talked about the effect of minimum wages on unemployment. Please read the article:
2019-23 As Push for Higher Minimum Wages Grows, New York Offers a Test, posted on MLS under Readings.
It is a mandatory reading; there will be question (s) about it on the exam.
It describes the situation in adjacent areas in two neigbouring states: New York and Pennsylvania. New York has been increasing minimum wage significantly. It is now $11.10; next year it will be $12. In contrast, minimum wage in Pennsylvania is $7.25

Here is a graph showing restaurant employment changes in the counties at the border of Pennsylvania and New York

2019-22 FED on climate change

The US central bank, FES, has a dual mandate: "The Fed is legally charged with promoting stable prices and maximum sustainable job growth". It has recently started paying attention to global warming. The article posted under 2019-22 Readings describes the discussion. Please read the article.

2019-21 Interest rates and exchange rates

On Wednesday, the Bank of Canada kept its policy rate unchanged, while the Federal reserve reduced its policy rate by 0.25%. As you recall from chapter 4, that should result in a appreciation of the Canadian dollar. As you can see on the graph below, it actually depreciated.
Why? Hard to say. Perhaps currency traders expect that, with the US central bank stimulating the economy and Canadian central bank doing nothing, in the future the US economy will get stronger.
A more sinister explanation: currency traders got convinced, just before the US central bank move, that interest rates will fall. This means bond prices will increase. So they sold various assets, including Canadian bonds, and bought US bonds.

2019-20 Challenges for the new President of the European Central Bank

Christine Lagarde, the former French finance minister and head of the International Monetary Fund has started as the President of the European Central Bank (ECB); the home of the Euro. There is an excellent summary of her challenges in an e-mail from the Economist.
1. The European economy is weak, and the economy of the biggest country, Germany. is shrinking.
2. Central banks are run by committees (in ECB: the Governing Council), which is divided; her role would be to build a consensus.
3. The division in the Governing Council is about how aggressive should monetary stimulus be. In the latest round, 
- the policy rate (a short-term interest rate controlled by central banks) was reduced to -0.5% (i.e. banks that keep their reserves at ECB are charged 0.5% per year).
- ECB restarted a bond - buying program. ECB buys bonds, which raises bond prices and reduces their interest rates.
All this is to increase inflation in the Euro area to the target, just under 2%. As the graph below shows, the inflation rate has been around 1% for several years now (the core inflation, which excludes prices in volatile categories: in particular oil and food, is the one that matters).

2019-19 Bank of Canada decision on Wednesday

This is the last decision during the course, as the Bank of Canada announces the decisions once every 6 weeks, and we will be done!

Here is an article from the Globe and Mail: Bank of Canada expected to hold line on interest rates again, but how long can it keep diverging from rest of world?
As far as titles go, it is one of the worst in a long time.

What has been happening? Several central banks have been reducing interest rates. Why? Because their economies are weak. 
So why the Bank of Canada is not following? Because the Canadian economy is strong. Citing the article itself:
1. "Canada’s economic indicators have continued to hold up well during that time.[…]

2. The Canadian labour market added a stellar 135,000 jobs in August and September, […]

3. The Canadian housing market has found renewed traction, 

4. […] Bank of Canada’s closely watched quarterly Business Outlook Survey, released the day after the federal election, indicated that Canadian business sentiment has held up relatively well in the face of the global uncertainty, which has badly hurt business confidence in many other parts of the world.

I could finish this by simply paraphrasing Bill Clinton: It is the economy, stupid. As the Canadian economy is strong, there is no need to reduce interest rates, regardless of what others are doing.

But it gets worse. The author writes that: 

"[…] the most positive development may be the tentative trade pact reached between the United States and China earlier this month"

The problem: there is no trade pact. Trump announced one; the Chinese officials said nothing has been agreed to.

2019-18 Automation, AI and job loss

This Globe and Mail article describes the changes in labour demand at financial institutions in Canada. With the help of AI, many routine jobs are being eliminated.

AI and robotics will define job demand in the 21st century. You can find a lot of information here.

I the past there were waves of enormous labour market changes: from agriculture to manufacturing, and then from manufacturing to services. Each time economists worried that the massive job destruction due to technological progress will lead to mass unemployment. This has not happened, for two reasons: new jobs were created at pace sufficient to absorb people who lost their previous employment, and working hours declined.

Is this time different? It is difficult to say, but possibly yes.

AI and robotics are very versatile technologies. They may lead to a great disruption in the labour market, and it is difficult to see what jobs will be created. Creating large numbers of new jobs that cannot be done by computers and robots is a challenge.

In addition, the trend to shorter working hours seems to have stopped.

2019-17 VOTE!

This article has a subtitle: Our democracy today is dominated by the old, and young people are getting a bad deal.
This is an article about the US; in part dictated by the fact that all leading presidential contenders are well over 70. In Canada, the leaders of the three largest parties are all under 50, and two are 40 years old. But the bottom line is the same.
So on Monday vote. And get your friends to vote as well.

2019-16 Slower growth because of US-China trade war

From October 16 news summary by the Economist:
The International Monetary Fund slashed its forecasts for global economic growth, primarily because of the Sino-American trade war. The fund reckons world GDP will grow by just 3% in 2019, 0.3 percentage points less than it forecast six months ago. That will make it the slowest rate of expansion since the great recession of 2009 [sic - should be the Great Recession of 2008-9].

2019-15 Housing bubble index

This entry is just for your enlightenment as we will not be talking about housing or bubbles in this course. The Swiss bank UBS calculated a house bubble index. In a list of 24 "global cities" Toronto is second, Vancouver is sixth. Unfortunately the graph is too small to figure out what the numbers mean.

2019-14 Federal election 2019: Where do the parties stand on taxes and deficits?

The Globe and Mail has an excellent explainer on the fiscal proposals of the four federal parties (Liberals, Conservatives, NDP and Greens).

You should read the article before you go out to vote. And vote you should.

A few comments:

as we mentioned before (in 2019-11) voters are not worried about the deficits. So parties promise higher spending, cutting taxes or both, and do not provide full calculation of the cost of the promises.

A bit of history 

Note that the first two graphs below show expenditure and revenue of the Federal government as percentage of GDP. That is the correct measure. The fact that federal debt is around $700 bln is not very interesting without comparison to the size of the economy.

By historical standards program expenses are not large, but have been trending up. Notice the increase caused by the Great Recession.

Revenues are also low by historical standards but rising.

Deficits are small by historical standards and are declining. Note that except for the period 1996-2007 we have almost always had deficits.

2019-13 The Canadian economy is slowing down

According to the recent report from Statistics Canada, the Canadian economy has unexpectedly slowed down. In July, GDP was the same as in June, while analysts expected 0.1% growth (this is monthly growth, not year-to-year).

8 out of 20 industrial sectors contracted; output of goods-producing industries fell 0.7% and the decline was widespread. Construction also shrunk 0.7%.

As you recall, the definition of a recession includes a widespread decline affecting many industrial sectors and construction. So this reports is in accordance with the definition. But for a recession, the situation has to be protracted, and last several months. This is just a single month.

GDP growth sometime stalls - see the period between mid 2014 and mid 2016.

We are not alone. In the US manufacturing activity fell to the lowest level in 10 years. The report is a bit breathless - see the fragment below. But the bottom line is that our economies are slowing down.

So the current economic situation is worth watching.

The fragment below is from the Institute of Supply Management September 2019 report.
The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management^® (ISM^®) Manufacturing Business Survey Committee: “The September PMI^® registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. The New Orders Index registered 47.3 percent, an increase of 0.1 percentage point from the August reading of 47.2 percent. The Production Index registered 47.3 percent, a 2.2-percentage point decrease compared to the August reading of 49.5 percent. The Employment Index registered 46.3 percent, a decrease of 1.1 percentage points from the August reading of 47.4 percent. The Supplier Deliveries Index registered 51.1 percent, a 0.3-percentage point decrease from the August reading of 51.4 percent. The Inventories Index registered 46.9 percent, a decrease of 3 percentage points from the August reading of 49.9 percent. The Prices Index registered 49.7 percent, a 3.7-percentage point increase from the August reading of 46 percent. The New Export Orders Index registered 41 percent, a 2.3-percentage point decrease from the August reading of 43.3 percent. The Imports Index registered 48.1 percent, a 2.1-percentage point increase from the August reading of 46 percent. 

2019-12 Sometimes I am prescient

In the last class I told you about the secret card China has in its trade dispute with the US: rare earth metals (or minerals). Later on Monday it was reported that Canada, U.S. drafting plans to curb China's dominance in critical rare-earth minerals.
The timing is lucky; the issue is serious. Without rare-earth minerals a large part of modern industry will stop. 

2019-11 Bye bye defict worries

In this federal campaign both leading parties stopped worrying about the deficit. Liberals promise more spending, conservatives promise tax cuts, and balancing the budget is not on the agenda. Why is that? Here is what the author wrote as way of explanation: "Like the Liberals, the Tories can read polls that say the deficit isn’t voters’ chief concern. " 

2019-10 Four Collision Courses for the Global Economy

In this article Nouriel Roubini, a well known economist at New York University sums up the dangers to the world economy:

1. What he calls "a contest between US and China over trade and technology".

2. "Dispute" between US and Iran

3. Brexit

4. Argentina, which appears likely to default on its debts (for the ninth time in the last 200 years, and second time this century).

This was written on Sep 24, so I would add one more:

5. Impeachment investigation in the US.

Let's discuss them in turn.

ad 1. This is the most important. A major cold war between US and China over trade and technology will cause a decline in manufacturing, trade, capital spending and private consumption, pushing the world economy into a recession.

ad 2. A military conflict between the US and Iran would raise the price of oil to $100, causing a recession. Higher price of oil will, at the same time, lead to inflation. The combination of a recession and inflation is called stagflation The most important cases was 1973, following the war in the Middle East and in 1979 after the Iranian revolution.

ad 3. A disorderly Brexit may cause a recession in the European Union.

ad 4. A crisis in Argentina may lead to a capital flight from emerging countries.

You probably do not know it but the author. Nouriel Roubini, has the nickname: Dr. Doom. This is because he predicted the 2007-8 recession and the housing crash. In general, he is pessimistic about the future.

ad 5. The impeachment proceeding against the US president will result in increased uncertainty. With the US president under pressure, who knows how he can react? So be afraid of 2 above and perhaps 1 above. 

2019-09 Tax the rich

In today's New York Times there is an excellent summary of issues related to the growing prosperity of the (very) rich and ideas to tax them.

The basic idea is to create a wealth tax. One of the Democratic candidates, Elisabeth Warren, proposed 2% wealth tax on assets above $50 million and 3% on assets over $1 billion.

The estimate is that the tax will bring in $260bln a year, although there is no agreement about it.

There is an agreement, however, about the rising wealth of the rich.

One reason is the declining income tax rates. They were extremely high up to 1960, and very high before Reagan reduced them in 1980s:

2019-08 Guess what this is

The answer:

It is the cover of the climate issue of the Economist. Each bar shows the temperature in a single year.  Blue lines denote years when the temperature was lower, and red lines denote years when temperature was higher than the 1970-2000 average. 

The darker is the blue - the colder was the year; the darker was the red - the warmer was the year.

2019-07 I am not always right

In the last class I mentioned that the stock market reacts only to news. On Wednesday the general expectation was that the FED will reduce the interest rate by 0.25%. This indeed happened.
So: no news = no reaction? Actually, the market did react:

At 2pm, the time of the announcement, stocks jumped up, then fell, then jumped again, then fell even more.
Possible explanations:
- the market actually expected something else
- the expectation was not 100%; once the thing happens, any uncertainty is resolved
- the changes in stock market were quite small. Note that the volume did not change much.

2019-06 US central bank interest decision today

You can see monetary policy in action today. The FED (Federal Reserve) is making its interest rate decision in the afternoon.
Once every about 6 weeks the Federal Open Market Committee (FOMC) holds a meeting to decide on short term interest rates, the so called Federal Funds Rate. It is a rate at which banks lend reserves to each other overnight. The FOMC sets the target for the rate (which is 0.25% wide) and intervenes in the overnight market to make sure that the actual transactions between banks meet the target. The general expectation is that they will lower the interest rate by 0.25%, to the range 1.75%-2%. This follows a reduction by 0.25% on July 31 - the first in over 10 years.
What are the reasons for the reductions? The world economy is weaker; growth in China and in the EU has slowed down, and the tariff war between US and China is a major source of uncertainty. Add to this Brexit uncertainty and the attack in Saudi Oil facilities and the FED thinks it is prudent to get ahead of a potential slowdown in the US economy.


Read about it here

2019-04 There we go again

In the last class I mentioned that the regulatory changes due to the Great Recession are slowly eliminated. This WSJ article is about private banks: they are coming back to issuing mortgage - based securities that caused them so much trouble in 2008. Lesson forgotten?

So far - there is little reason to worry. Last year private institutions issued  $70 billion of mortgage bonds; in 2004 and 2005 they issued over a $ trillion.

2019-03 Fannie Mae and Freddie Mac become acceptable again

Last week I mentioned that a week before Lehman collapsed, Fannie Mae and Freddie Mac were saved from bankrupcy. This is discussed in the Wall Street Journal article.
Fannie and Freddie are unusual companies, often called government-sponsored enterprises (GSEs). They buy mortgages from originators and convert them into securities. They serve as the backbone of the mortgage market in the US. There is an implicit understanding that they will be bailed out by the US government if they get into trouble. This is what happened on September 8, 2008.
The companies were money-making machines. Because of the implicit protection from the US government, they could borrow at very low rates. But during the housing boom, they took on too much risk were no longer viable.
Initially, the government wanted to eliminate the companies but now they have regained politicians' support. In part, it is because, as the market rebounded, they started making large profits. The government bailout involved taking over almost 80% of the companies and suspending dividends to existing shareholders. As the companies recovered, they paid dividends to the US government that greatly exceeded the amounts they received. In the end, the bailout of Fannie and Freddie not only avoided market meltdown (though only for a week) but also  provided a profit to the taxpayers. The picture below shows how big were the amounts involved.

The next figure shows the role of Fannie and Freddie in the US mortgage market. Note that
- their share of mortgages financed or insured has fallen during the housing boom;
- it has since rebounded
- private financing almost completely evaporated between 2008 and 2017.

2019-02 The cost of climate change

The course does not cover climate change (perhaps it should?) so to fill out the gap, here is a recent paper (Long-Term Macroeconomic
Effects of Climate Change: A Cross-Country Analysis) that estimates the effect of climate change on GDP. The paper is very comprehensive, and you would have to read it yourselves to get the full picture (and see what a good economics paper looks like). So here is the basic info.
Figure 1 shows the projected increase in temperature, in degrees Celsius, if 1. nothing is done and 2. under the Paris accord. 
1. If nothing is done by 2100 the temperature will increase by 4 degrees Celsius.
2. The Paris accord, if successful, limits the temperature increase to one degree Celsius.

The rise in temperature, of course, differs across countries. We will not do too well: the temperature increase in Canada is in the top 20 out of 174 countries

So what is the effect? If nothing is done, in 2100, because of global warming, the world GDP will be 7% lower; with Paris accord, it would be only 1% lower.

Canada is a northern country, so maybe you expect to have beachy holidays in Iqualut, or go to the beach on Lake Ontario during the winter break. But, actually, global warming will have a particularly big impact on Canada. if nothing is done, our GDP will be 13% lower. This is the fourth biggest reduction among the 174 countries (after Bhutan, Montenegro and Kazakhstan).

If the Paris accord holds, Canadian GDP would be only 1.7% lower. This is a gain of 11.4% of GDP: the highest of the 174 countries in the study. We actually benefit the most from keeping global warming to 1 degree.

2019-01 How recessions start (from the Economist)

There will be a lot of talk during the course that a recession is coming. An excellent article from the Economist - a weekly magazine with outstanding business and economics sections, as well as economic data. It is definitely worth reading. You can find it at:

01 the Economist: How recessions start  

The article summarizes how recessions start.            Typically, they start with a shock: an increase in oil price, austerity, financial panic, large increase in interest rates. But sometimes they start when the mood of consumers and investors shift. This is because pessimism is contagious: if consumers become pessimistic about the future and reduce purchases, demand would fall, firms would delay investment plans and unemployment would rise, validating the increase in pessimism.