12. Inflation continued

 So: inflation is at the highest level in about 30 years.

In today's Globe and Mail, there are two interesting articles

On politics of inflation: the opposition party knows that high inflation is government's fault

There is a good explanation of what may happen:

"High inflation, which has been off the Canadian political radar for best part of three decades, is the ultimate pocketbook issue. A sharp jump in the general price level erodes the buying power of a dollar and cuts into [real] wages. Central banks typically respond by raising interest rates to reduce demand in the economy, meaning that mortgage rates and other debt servicing costs are almost certainly going up over the next year."

More importantly: how inflation becomes entrenched

"Already, the country’s largest public-sector union, the Public Service Alliance of Canada, is warning that it expects wages to keep up with what it calls “soaring” inflation when it negotiates contracts for 110,000 civil servants in 2022. They’re asking for raises of 4.5 per cent each year for three years. Talks start in January.

PSAC members won’t be the only ones looking for wage increases. Employees who feel they are losing purchasing power want to be kept whole. Unions will push for higher raises, not just for this year, but over the course of their contracts."

The second article nails the problem: if inflation feeds into wage contracts, then it will last. Higher wages lead to higher costs lead to higher price increases and high inflation continues.

11. Inflation in Canada

 From Statistics Canada:

The Consumer Price Index (CPI) rose 4.4% on a year-over-year basis in September, the fastest pace since February 2003 and up from a 4.1% gain in August. Excluding gasoline, the CPI rose 3.5% year over year in September.

Prices rise in all eight major components, 12-month % change

	August 2021	September 2021
All-items Consumer Price Index	4.1	4.4
Food	2.7	3.9
Shelter	4.8	4.8
Household operations, furnishings and equipment	1.5	1.5
Clothing and footwear	-0.2	0.2
Transportation	8.7	9.1
Health and personal care	2.9	3.0
Recreation, education and reading	2.2	2.1
Alcoholic beverages, tobacco products and recreational cannabis	2.6	2.1

10. Inflation in the US

 Today in the morning the US Labour department published inflation data for October.

Statistics Canada will publish Canadian October data on November 17, so we will have a look then.

Here is what is happening in the US:

Summary

More information

Inflation is 6.2%, the highest since 1990. Main reason: energy prices increased by 30%. Food prices increased by 5.3%. Excluding food and energy, the inflation rate was 4.6%, the highest since August 1991. Used cars (26%) and new cars (10%) contributed a lot, but the increase in prices for shelter (3.5%) was also higher than the goal of monetary policy (around 2% inflation).

9. Labour shortages

 Labour is now in short supply.  Yet employment is still lower than 2 years ago. This causes endless problems for many businesses. So the question is: where did the workers go?

Paul Krugman, in an opinion in the New York Times, summarizes explanations:

1. Enhanced unemployment benefits during the pandemic provided financial cushion that workers use to search for a better job

2. People are still weary to go to work; also, they may have problems with care for their children

3. A nudge: workers in poor jobs realized how bad their jobs were. And so they quit and look for something better.

Of course these explanations are not mutually exclusive.

8. Taxing the gadzilionaires

8.  According to an analyst at Goldman Sachs, Elon Musk is going to be the first person to reach the wealth of $1 trillion (i.e. $ 1 000 000 000 000). The analyst based it on the projections of the value of the other company Mr. Musk set up: Space X.

For now (as of yesterday) he is worth a mere $ 275 000 000 000 - see Real Time Billionaires (forbes.com). Still far from the nominal value of the Zimbabwean note I showed you, but getting there.

There are 11 people/families in the world worth over $100 billion.

Right now the way to avoid paying taxes by rich people in the US goes as follows:

1. Do not sell shares

2. Borrow money against the shares to finance your expenses

3. Give the shares to your offspring in your will

4. When you die, they do not pay any tax on the capital gains.

So if Mr. Musk passed away today, and if he had left all his shares to X Æ A-12, the capital gains of $279 billion would not have been taxed.

In the US, they are trying to extract some of this wealth by introducing a billionaire tax. If you have at least $ 1 billion, or had an income of at least $100 million in each of the last three years, you will have to pay a tax on unrealized capital gains.

Why are they doing it? Not because they think it is a good idea. This is the best Democrats have left as earlier proposals for a tax increase would not be passed by Congress.

7. Expiration of Covid benefits; and Canadian banks commit to environmental causes

1. Canada Covid-induced benefits (a wage subsidy and a rent subsidy (for firms and non-profits, not for individuals) are set to expire on Saturday.

If you follow the discussion whether to extends benefits, you can learn why governments find it easier to give money than to take them away. Most of the discussion is about hospitality industry, which still faces some restrictions. But the subsidies apply to all businesses that had a revenue decline of at least 10% since the pre-pandemic times. 

Of course if you ask people who receive money (or their representatives, for example business associations) they will tell you extending the benefits is absolutely necessary. This is an example of skewed incentives: they get the full benefit, but pay only a fraction of the cost, with the rest of the bill picked up by taxpayers.

You can read more about it here:

Canada’s COVID-19 benefits are set to expire on Oct. 23. Here’s what you need to know - The Globe and Mail

2. And on a positive note, the big Canadian banks signed up to the United Nations Net-Zero Banking Alliance, formally committing to shifting their lending away from projects and activities that generate greenhouse gas emissions “to align with pathways to net zero by mid-century, or sooner.” 

Opinion: Canada’s banks join Mark Carney, signaling a shift from the West’s fossil fuel dependency and delighting OPEC - The Globe and Mail

6. Debt limit again, and international trade is expected to grow

 

The Council of Economic Advisers is an office that advises the US President President. Here is what they have just written:

A default would send shock waves through global financial markets and would likely cause credit markets worldwide to freeze up and stock markets to plunge,” officials at the White House Council of Economic Advisers warned. “Employers around the world would likely have to begin laying off workers.”

The potential for an ensuing global recession, they wrote, could be worse than the 2008 financial crisis, because it would come as countries continue to struggle to escape the coronavirus pandemic. Adding to the burden, Congress and President Biden would be unable to spend money to prop up the economy until the debt limit, which caps the amount that America can borrow, is raised.

“The federal government could only stand back,” they wrote, “helpless to address the economic maelstrom.”

In other news

According to the World Trade Organization, world trade will continue to increase, especially exports from Asia. They expect the problem with freight across the Pacific to become less pronounced. But Africa will be left behind because of limited access to vaccines.

Global Trade Boom to Continue After Covid-19 Reopening Bounce - WSJ

5. What can be more valuable than bitcoin?

Answer: a little piece of platinum.

Huh?

Ok, so the US is approaching the debt limit. As we discussed before, this is political craziness. The US congress approved  commitments to spend money in the future (for example to pay for medical care for old people (Medicare) and poor people (Medicaid) or new tanks and planes, military salaries, or electricity for the US embassy in Ottawa. To pay for this spending the government needs to borrow money. But the congress that approved spending now does not want to approve borrowing to pay for it. That is the debt limit that will be reached in the middle of October.

What to do? More and more commentators argue that crazy requires a crazy solution. Legally, the US Mint (the institution that mints US coins) can mint a platinum coin of any denomination. Coins minted from any other metal are restricted to a face value of no more than $50. 

So the crazy idea is for the Mint to take a piece of platinum and stamp $1 trillion on it. That creates seigniorage:  the difference between the face value of the coin and the cost of making it. I do not know how much platinum would have to be used, but not much. 

Seigniorage belongs to the US Treasury department. And so, with this maneuver, the US government bypasses the debt limit and can pay obligations already approved by the congress.

Note: this all deals with spending that has been approved by the congress. Any new spending would have to be approved separately.

BTW, the market cap of bitcoin is $0.91 trillion.

4. Debt limit in the US - what is going on?

In the US, legislation limits the amount federal government borrows. The limit was suspended 2 years ago. 

The rest is (quite) a bit crazy, so read it carefully.

The debt limit was reached Aug 1, 2021. To pay US federal obligations, the Treasury department (i.e. Ministry of Finance) has been using "extraordinary measures" - equivalent to looking for spare change among your couch cushions. Some time around mid October these measures will no longer be sufficient. one of three things will happen:

1. The Congress will increase or suspend the limit.

2. US will default on its debt (i.e. some US government bonds or their interest will not be paid). Before this happens, markets will wobble; if it lasts any length of time, it will be a disaster for the world economy.

3. An interesting option is for the Federal Reserve to enable funding of government operations by buying US debt in the open market and ignoring lack of repayments.

So what is it all about? Politics. Republicans are hoping that problems will worsen the fortune of Democrats. They argue that they do not want allow Democrats to increase spending in the future.

Does  the explanation make any sense? Not at all. They talk about future spending; the debt is the result of a past spending. It has been best explained in the letter of the Treasury Secretary to the congress (Debt-Limit-Letter-to-Congress-20210723-Pelosi.pdf (treasury.gov)):

" Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents."

Can we predict what will happen? my bet is 1 above, but who knows.

In Canada, we do not have such problems, or nonsensical politics.

Note that the thrid option is interesting. The FED can legally do it if pushed against the wall (it would help stabilize the US economy). But they would hate to do it because this would mean financing government debt. Also, they think even talk about it is dangerous because it encourages politicians to be intransigent. 

3. Ever (not so) Grande

 The second largest property developer in China (Evergrande) may go bankrupt.

I am not a specialist in Chinese markets in general and property developers in particular, nor do I know how the communist party makes decisions. My best bet is that, if trouble gets serious, the Chinese government will take over the company, put founders and managers in jail for mismanagement, and put in enough money to paper over the problem. The Chinese economy (in nominal terms) in 2020 was about the same size as the US economy in 2008, and Evergrande liabilities are less than half Lehman liabilities.

Nonetheless,  some people compare the problem to Lehman in 2018 ("Evergrande teeters on the edge of collapse. Will China step in to avoid a ‘Lehman moment’? Globe and Mail Sep 21):

"While an Evergrande collapse would cause immediate misery among Chinese homeowners and workers, the fear is that, as losses ripple out to the company’s lenders and bondholders, China’s entire real estate market could stumble – similar to how the collapse of Lehman Brothers sparked the slide of the U.S. housing market in 2008, sending the American economy into recession."

Correct? Not at all.

So we already established that the comparison is an exaggeration. The sentence in bold above (my choice) is misleading. US housing market started "sliding" before Lehman went bankrupt, and the US economy has been in a recession since December 2007.

2. Give people free money; would they avoid work?

Actually, it is the other way  round: take away the free money; will people find work instead?

Here is the issue. In the US, unemployed people were getting up to $300 a week in addition to the regular unemployment benefits. Half of the states eliminated the support over the summer, while the other kept it.

Question: if you give people extra money when they are unemployed, will they dissuade them from working? Or, alternatively, would withdrawing the benefits induce people to get a job?

No brainer, right? This is what conservative policymakers in the US argued. If you give people money when they are unemployed, they will stay unemployed. Take away the money, and they will be forced to find jobs.

Reality: here is a citation from the Wal Street Journal ( States That Cut Unemployment Benefits Saw Limited Impact on Job Growth; WSJ Sep 1, 2021):

"States that ended enhanced federal unemployment benefits early have so far seen about the same job growth as states that continued offering the pandemic-related extra aid, according to a Wall Street Journal analysis and economists.

Several rounds of federal pandemic aid boosted the amount of unemployment payments, most recently by $300 a week, and extended them for as long as 18 months. The extra benefits are set to expire nationwide next week. But 25 states ended the financial enhancement over the summer, and most of them also moved to end other pandemic-specific unemployment programs such as benefits for gig and self-employed workers.

Nonfarm payrolls rose 1.33% in July from April in the 25 states that ended the benefits and 1.37% in the other 25 states and the District of Columbia, the Journal analysis of Labor Department data showed."

Maybe the average person is not a lazy bum, and they would like to find a job regardless of the amount of money they get when unemployed.

A possible explanation: child-care responsibilities and general concerns about safety and health with the pandemic still continuing.”

1. Sep 15, 2021 Inflation: is the high inflation temporary or will it become entrenched?

 Yesterday, the US Labor Department announced that inflation in the US (August 2020 to August 2021) was 5.3%.

Excluding the last few months, this is the highest in many years, and way above the target of 2%.

There are several explanations for the high inflation;

1. Shortages (of everything from microchips to olives - check this: Ford to Idle or Curb Output at More Plants Because of Chip Shortage, WSJ June 30 )

2. High freight prices

3. Shortages of workers, which lead to high wage increases

The question that economists (and politicians) are asking is whether the high inflation will stay, or whether this is a temporary blip, caused by the above factors which are, generally, temporary.

Economists surveyed by the WSJ predict inflation to fall to 2.5% in 2022 and 2.43% in 2023.

We will talk about more in the course. 

Two useful pieces of info for the course;

Measures of inflation

Apart from the regular inflation measure (5.3% in August), often refereed to, incorrectly, as CPI (inflation is a percentage change in CPI), there is Core inflation, which excludes the most volatile elements (food, energy) (4.1%) and trimmed mean CPI, which excludes the items that changed the most during the period (increased the most of fell the most): (3.2%)

Real versus nominal variables

Wage increases for the 25% lowest earning workers were 4.8% in August, the fastest increase since 2002. Good? No. This is the nominal wage: the number of dollars people get.

The real wage (i.e. how much the wage buys), which is the one that matters, has been falling.

(see WSJ, Sep 14, What’s Your Raise Really Worth? Inflation Has Something to Say About It. For the lowest-paid Americans, real wages—adjusted for rising prices—fell 0.5% in August from a year earlier).

****************EC 250ab blog is back ****************

In the past I was writing a blog for EC250 students where I would post a link to a recent interesting article that would be useful in understanding economics (in that order).

I skipped this last year, given the pandemic disruption, but it would be useful to restart the practice.

So I will post things from time to time; mostly my comments on current events. Hopefully, it will be helpful.

Sep 15 is a good time to start the blog. Notable things that happened on that date:

• 13 years ago, the Great Recession started, with the collapse of Lehman Brothers
• 5782 years ago everything started, according to the Jewish calendar