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.