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