Posted Stuff
12:49 PM, April 30, 2009In class on Tuesday we looked at a lot of pictures from the IMF World Economic Outlook report. We’ll look at some more today. The report is a big document, painstakingly put together, and 250 pages long. If you’re interested in glancing through it, the link above will take you to the WEO webpage. The entire report can be downloaded as a pdf, or you can download individual chapters, tables and figures.
Also, posted are:
- A new assignment (due next week). I’ll post answers on Wednesday so you have a chance to evaluate where you went wrong, before the exam. Obviously, some of you will blindly copy the answers, but hopefully, most of you won’t.
- Answers for last week’s assignment.
- Today’s lecture notes (includes what you’re responsible for on the exam, and a note on grading).
- A handout (the last one for the semester) on fiscal stimulus by James Suriwiecki of the New Yorker. An excerpt:
Popular as Keynesian fiscal policy may be, many economists are skeptical that it works. They argue that fine-tuning the economy is a virtually impossible task, and that fiscal-stimulus programs are usually too small, and arrive too late, to make a difference. And since the money to pay for fiscal programs has to be borrowed and paid back in taxes, it’s a wash for the economy as a whole. If the government gives you six hundred dollars but you know you’re eventually going to have to pay six hundred dollars back in taxes, it may not feel like much of a gift. The economist Russell Roberts argues that using fiscal policy to get the economy going is like “taking a bucket of water from the deep end of a pool and dumping it into the shallow end.” [link]
See you in class shortly.
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FEDge Fund
11:40 AM, April 30, 2009The Fed is actually making a few bucks off this recession – at least on its balance sheet. It’s mostly from the interest income it is earning by buying all those instruments (low-return Treasuries, from open-market operations, and high-return “toxic” assets from banks). Let’s hope it doesn’t spend it all in one place…
Last year the central bank reported a whopping $43 billion in operating income. That was more or less the same level as in 2007, but meanwhile short-term interest rates had plummeted, ending the year near zero. That should have clobbered Fed income, as rate cuts did in the early days of the last recovery in 2002-04 (see chart).
But it did not, for two reasons. First, to shore up financial markets the Fed has pumped up its balance-sheet—its total assets were $2.2 trillion on December 31st, more than double their level of a year earlier. Second, it has been trading in low-risk, low-return Treasury debt and buying higher-yielding private debt—discount loans to banks, commercial paper, and mortgage-backed securities, for example. [link]
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Hot Economists
1:05 PM, April 29, 2009Including your text book author. From The Daily Beast.
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An Assignment + Deglobalization (Handout)
12:19 PM, April 23, 2009I’ve posted lecture notes for today, an assignment (due next Wed/Thurs), answers to last week’s assignment and a new handout on ‘Deglobalization’ from The Economist that we are going to talk about in class. An excerpt:
THE economic meltdown has popularised a new term: deglobalisation. Some critics of capitalism seem happy about it—like Walden Bello, a Philippine economist, who can perhaps claim to have coined the word with his book, “Deglobalisation, Ideas for a New World Economy”. Britain’s prime minister, Gordon Brown, is among those who fear the results will be bad.
But is globalisation really ending? The world’s economies are certainly slowing fast. And the speed and scale of this recession are raising doubts about the assumptions that had underpinned the drive to integrate world markets. At the end of 2008 the IMF said the world economy would grow 2.2% in 2009, less than half the rate in 2007. Now it thinks growth will be just 0.5% this year, the lowest for 60 years. Even that may be optimistic; in the last quarter of 2008, some economies shrank at annualised rates of over 10%. [link]
We’ll be starting the class off by talking partly about this and a few other things as well. See you shortly.
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The Magical Monetary World of Econoland
9:47 AM, April 17, 2009A new initiative by The Economist:
…The Economist Group is delighted to announce the development of a public-entertainment facility that combines the magic of a theme park with the excitement of macroeconomics.
Among the thrilling experiences Econoland will offer are: The currency high-roller: Float like a butterfly with the euro and drop like a stone with the pound!Chamber of horrors: Tremble at the wailing of distressed debt! Fiscal fantasyland: Watch the economy shrivel before your very eyes as you struggle to stop growth falling!
“Econoland will appeal to the kid in everyone”, said a spokesman for The Economist Group, “although children themselves will not be admitted”. The park will open on April 1st. [link]
Below, a partial map of one of the sections – Financial Fantasyland:
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Demographic Transitions from the Past
9:52 AM, April 16, 2009Sir David Attenborough, a famous naturalist and broadcaster for the BBC, writes on population forecasts over the last fifty years, and how wrong they can get.
People are not good at seeing the future, particularly the future of people. The problem is that people are changeable, they don’t always do in the future what they do now. People, being people, know this – or should – but often carry on regardless.
Total population change in a country comprises three elements: migration, lifespan and fertility. In no case have people done what they were meant to. The numbers came out and then, drat them, people had the nerve to live even longer, just like that. [link]
While we are familiar with the concept of the demographic transition, Britishers in the 1960s apparently weren’t. Take a look at the actual number of births along with some forecasts from the past.
Sir David is a member of the Optimum Population Trust, a group that advocates population control by killing everyone whose household income is in the lowest quintile. I’m joking of course – that would be a version of a modern day Malthus. The OPT actually asks for voluntarily limiting births, and a few other humane options for limiting population growth, to allow for the protection of wildlife and nature.
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Irving Fisher + Things Posted
12:41 PM, April 15, 2009I’ve posted an answer key for Exam 3, yesterday’s lecture notes, and a new assignment (due next week – 4/22, 23) on Chapter 7.
Also, I’ve posted an interesting article from an Economist from February of this year, on Irving Fisher. While it has little to do with what we’ve learned of Fisher (i.e., the Fisher effect), it certainly throws a new light on an old economist. And given that we are spending all this time learning about Keynesian economics, it doesn’t hurt to learn something about his lesser-known contemporary. An excerpt:
As parallels to the 1930s multiply, Fisher is relevant again. As it was then, the United States is now awash in debt. No matter that it is mostly “inside” or “internal” debt—owed by Americans to other Americans. As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions. In 1933 he wrote:
Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. [link]
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Prices
12:00 PM, April 15, 2009Deflation, like inflation can be a serious threat to the economy. Yesterday, we saw how M1 has been expanding fairly rapidly of late.
Notwithstanding its relationship with velocity (which is interesting, but not the focus of this post), we know, from the Quantity Theory that increasing money stock leads to increasing prices. So why is there no fear of inflation this time? Because of current deflation. From EconomPic Data:
However, this is not to say that inflation is not a fear at all. When things turn around, there might be inflationary fears. As Prof. James Hamilton says, on Econbrowser,
In other words, if the Fed decides that, as a result of inflationary pressures, it needs to undo some of the expansion in its liabilities at a time when it is not prepared to unwind its asset positions, Plan B is for the Fed to borrow directly from the public.
Which brings me back to the original question. Does the explosive growth of the monetary base in Figure 1 imply uncontrollable inflationary pressures? My answer: not yet, but stay tuned. [link]
Since inflation is still a while away, and deflation is still very much in the air, here’s an interesting explanation of why deflation can be problematic. Rohan Narayen (from 100B) sent me the link:
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The Fed’s Balance Sheet
11:33 AM, April 15, 2009In yesterday’s class, we talked about the Fed Balance Sheet from a post at the Wall Street Journal’s econ-blog, Real Time Economics. They will be updating it weekly. Here’s a screenshot of the latest version of the sheet:
Now, besides looking extremely pretty (what with the colors and all), there is significance to the fact that the balance sheet is now an object of attention. Prof. James Hamilton of UCSD explains on Econbrowser (another econ-blog):
I would suggest first that the new Fed balance sheet represents a fundamental transformation of the role of the central bank. The whole idea behind open market operations is to make the process of creating new money completely separate from the decision of who receives any fiscal transfers. … The philosophy is that the Fed should base its decisions on economy-wide conditions, and leave it entirely up to the market or fiscal authorities to determine where those funds get allocated.
The philosophy behind the pullulating new Fed facilities is precisely the opposite of that traditional concept. [link]
This means that the old model of open market operations has been suspended, and the Fed has taken on an entirely new, more interactive approach, with the idea that their actions will act as a stimulator to the stagnating liquidity market.
I highly recommend you read and understand Prof. Hamilton’s comment on the new balance sheet.
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