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.