2016-24 Messing up with the monetary system

Last week,  the largest Indian notes were declared to no longer be "legal tender". The large notes, 500 and 1000 rupee notes, constituted 86% of cash in India. The goal of the operation was to reduce corruption.

What is happening now?

• people are running from one cash machine to another to get 100 rupee notes (largest available) with limited succes
• real estate transactions, which are often made in cash, are at a standstill
• low denomination notes are in short supply, with households hording small notes. This means lower spending
• potential hit to growth is large: "UBS economists wrote Tuesday that if cash supplies remain in disarray for another three weeks, as Finance Minister Arun Jaitley has suggested, 1.2 percentage points could be shaved off India’s economic growth, which at more than 7% is presently the fastest among major nations."[...]"“Everything is stopped right now,” said Sunny Narang, who helps run a steel factory near Delhi."
• What happens when cash in short supply? Barter: "In the village of Dalan Chapra, deep in India’s northern hinterland, the cash crunch is forcing residents to return to the original cashless transaction: barter. They are swapping corn and rice for lentils and vegetables, a practice once known only among the village’s poorest."
• Here are some doubts on whether the operation will be successful: "Whether forcing people to turn in their big bills once will deter them from concealing their earnings in the future is an open question. In India, wealth generated outside the taxman’s purview is also stored in property, business assets and precious metals and gems."

2016-23 meanwhile in Canada

As we have already discussed (post 2016-10) Canada is, similarly, planning a fiscal stimulus. This is "Mr. Trudeau’s plan to jump-start economic growth by running a budget deficit to fund sweeping spending on roads, schools, bridges, hospitals and other infrastructure."

So, as it turns out, our liberal government has some of the same plans as the Mr. Trump. In the Canadian case, it was called a bold move, observed by other countries. Perhaps this inspired the president - elect.

2016-22 Trump's economic policy

This article discusses what policies the president - elect may pursue. Here are some quotations

"He wants tax cuts and increased spending on infrastructure. In other words more stimulus to the economy from the government budget."

"The aftermath of the financial crisis was an important part of the background to Mr Trump's election success. The subsequent recovery has not been particularly strong. Many Americans, especially in former industrial areas, have felt that it has passed them by.

Most of the work in terms of economic policy to support that recovery has been done by the US Federal Reserve, the country's central bank."[...]"The Fed has maintained a policy of ultra-low interest rates, keeping a key rate for lending between banks rates practically zero until a year ago. That tends to keep rates low across the economy. Even now that interest rate which the Fed targets has been raised only once since the crisis and is just a little above zero.[...]The Fed also ran a programme of "quantitative easing", buying financial assets with newly-created money. That may have helped add to the downward pressure on interest rates paid by businesses and households."

"But what about support from the government budget, or fiscal policy? Tax cuts and spending can be used to provide economic stimulus. It has often been done in the past in the US and many other countries. President Obama did do that in his first term, with the American Recovery and Reinvestment Act in 2009, a programme worth $800 billion."

"[...]more recently, Fed officials are thought to have believed that more stimulus from fiscal policy (taxes and government spending) would have been useful."

"Mr Trump's plans so far suggest a stimulus to the US economy from the Federal government budget. That means the Federal Reserve is likely to feel less need to continue providing its own stimulus in the form of its exceptionally low interest rates."

"Apart from anything else, higher Fed rates would give the central bank more ammunition - more scope to cut rates later - when the US economy has another downturn, as it surely will sooner or later."

A summary

• The recovery form the Great Recession was weak. The main economic policy was the low interest rates maintained by the Federal Reserve.
• Trump's plans include tax cuts and spending on infrastructure. 
• That is a traditional fiscal policy to stimulate the economy. For example, in 2009 in the US there was a fiscal program with extra spending of $800 billion, or around 5% of GDP.
• The fiscal stimulus will reduce the need for low interest rates and will allow the FED to start raising interest rates, perhaps as early as the next policy meeting, 13-14 December.
• Higher interest rates now will allow the use of monetary policy in the future, when a new recession comes.

2016-21 Trump's win and financial markets

All predictions were that Clinton would win. As I am writing this (11pm Tuesday) it seems that the result is a surprise: it looks like Trump will win the election. Florida has just been called for Trump.

How do markets react to surprise? We have seen before that markets view Trump's win negatively. And indeed:

• Asian markets fell (except for China)
• Dow Jones futures fell 4% (700 points)
• Which country is expected to lose the most if Trump wins? Mexico. And, indeed: "The Mexican peso has plunged more than 10% to an all-time low"

What is the problem? Uncertainty. Here is a comment from the CNN:

"Investors turned to assets that are seen as safer bets in times of uncertainty. Gold jumped more than 2% and the Japanese yen surged more than 2% against the dollar."

What about the Canadian dollar? It should appreciate, especially if Americans will now move to Canada. You know: they will be selling assets in the US and buying assets in Canada.

We will see tomorrow

2016-20 A successful money manager

David Swensen has been running Yale endowment fund for a long time. This article tells his story and describes his approach. It is worth reading, especially if you aspire to have a career in finance.

2016-19 It is not over until it is over

No, it is not about game 7 of the World Series
It is about the Comprehensive Economic and Trade Agreement (CETA).
Now in the Netherlands they are demanding a referendum 
And they may get their wish. And kill the agreement
Here is one objection:
“TTIP and CETA are old-school trade agreements where the interests of companies are more important than the people who live in those countries,” 

2016-18 Canada's housing bubble

House prices in Canada have been increasing rapidly, in particular in Vancouver and Toronto.
This article from McLean's shows that, in comparison with the house bubble in the US which preceded the Great Recession, it looks pretty bad.

NOTE: THE ARTICLE IS AVAILABLE AND YOU SHOULD READ THE ARTICLE, NOT JUST MY BRIEF COMMENT