Bloat-TV

Sure, the holidays are a time for family, but they're also a fine time for binge-watching TV.  This year we've been watching a couple of spooky series that show just how much TV programming has changed over the decades.

We keep being told that we live in a golden age of television, blessed by offerings like Deadwood, Mad Men, The West Wing, Breaking Bad, and on and on.  In the last year or two a lot of well-received material has been originated by Netflix.  Just before Christmas, it dropped (with little fanfare) a sci-fi/fantasy series called The OA, co-written by and starring Brit Marling.  Without spoiling it for anyone who hasn't seen it yet, I can safely reveal that the principal focus is near-death experiences and the people who survive them.

Like the other series I've listed, The OA unspools at a measured pace, with eight episodes of varying lengths.  There's lots of flashing back and forward in time, a large cast of characters and plenty of unexpected twists and turns.  And, like so many other such series, it doesn't actually reach a conclusion: the ending is ambiguous to say the least, and sure enough, a quick Google search reveals that Ms Marling and her co-auteur, the marvellously named Zal Batmanglij, are hoping to secure funding for another series, or two, or even three!

What ever happened to telling a story economically?  The creators of Breaking Bad will freely admit that the story took on a life of its own: for example, the character of Jesse Pinkman was supposed to be written out at the end of the first series, but ended up as a mainstay of the entire six-year run. Marling and Batman say they have a complete story arc for The OA that can unfold over several seasons, but it's very likely that the tale will evolve in the writing.

You couldn't find a sharper contrast for this style of story-telling than The Twilight Zone, which is now available in a 25-disc complete set, and which found its way under our Christmas tree this year.  Each episode runs for less than 30 minutes, yet manages to create from scratch a coherent scenario in which the action takes place.  The stories don't always reach a clear conclusion -- indeed, that's often the point -- but each episode is entirely self-contained.  The show's creator, Rod Serling, gave himself absolutely no wiggle room -- at the conclusion of each week's show, he would briefly appears on screen to offer a teaser about the following week's entirely different episode.

I'm not suggesting that even Rod Serling, genius that he was, could have told a complex story like that of The OA in less than half-an-hour.  However, there are times, watching The OA or even much superior shows like Breaking Bad, when you wish the writers could have reined in their self-indulgence a bit and just got on with the story.  

Holiday potpourri (with added cauliflower)

Just a few brief thoughts before the Christmas break....

* Canada's headline CPI for November was reported yesterday.  The year-over-year rise of 1.2 percent was slightly lower than expected, something which StatsCan attributed to lower food prices.  Ah yes! At this time last year we were enduring the great cauliflower ripoff, with heads of the cruciferous staple selling for as much as ten bucks.  It was all the result of the drought in California, plus the enfeebled state of the Canadian dollar.  This year prices for cauliflower (and other imported produce) have come back down from the stratosphere, resulting in the lower-than-expected headline CPI.

* But of course, the Bank of Canada told us a few months ago that it was no longer going to focus on either headline or core CPI in assessing its inflation target, instead unveiling three oddly-named new indicators.  This month, for the first time, StatsCan has reported the values of those measures.  Two of them -- CPI-common and CPI-trim --are slightly higher than the headline figure.  The third -- CPI-median -- has been at or above the Bank's 2 percent inflation target for the past four months.  Two thoughts here: if the Bank is taking these measures seriously, then the comfortingly low headline CPI measure may not be the best guide to future policy; and, if these measures continue to diverge widely, it will become harder for markets and analysts to assess what the Bank might be about to do next.

* Canada's real GDP unexpectedly fell 0.3 percent in October, abruptly ending the rebound from the impact of the Fort McMurray wildfires.  The weakness was broad-based, but what will concern policymakers most is the sharp decline in the manufacturing sector, with exports of manufactures remaining particularly weak.  If Justin Trudeau is serious about going along with Donald Trump's demand for changes to the NAFTA agreement, Canada will not be negotiating from a position of strength.

* Last but not least, the housing market.  Prices for detached homes in Toronto have risen 27 percent in the last year, prompting the media to declare that the local market is now the "least affordable" in Canada.  That can't really be true, can it?  I mean, if homes were unaffordable, prices would be going down, not rocketing higher.  Evidently there are still plenty of buyers at these prices -- another news story earlier in the week talked of a two-day open house north of the city that attracted 400 viewings and 50 offers.  I understand what the reporters are trying to get at, but I don't think "unaffordable" is the right word.  "Preposterous" or "cruisin' for a bruisin'" might be better.

Best wishes for Christmas and the holiday season to everyone who's been kind enough to read this blog in 2016.  I can't imagine what I'll find to write about in 2017....

My economist can beat up your economist

Watching the UK economy from afar, it's striking how much people's take on what's going on is driven by how they voted in the referendum back in June.  The Remainers (or Bremoaners as the tabloid press has christened them) see economic disaster looming at every turn, while the Leavers are gloating that the most dire pre-referendum predictions have failed to materialize.

Some of the discussion has been truly bizarre.  The "Project Fear" campaign on the Remain side was clearly overdone, though not nearly as mendacious as the Leave side's promises, which have long since been reneged upon.  However, the willingness of Leave campaigners to declare, within days of the vote, that since the sky hadn't actually fallen, everything would be all right, was clearly premature.  It was always going to take some time for the impact of the vote to be felt; so, six months on, where do things stand?

The Guardian has been compiling a monthly report of key indicators, and the latest update can be found here.  As a strong voice on the Remain side, The Guardian chooses to interpret the data in a mildly negative way: the UK economy is "at a tipping point".  Maybe it is, but you'd be equally entitled to see the figures in a much more positive light. Wages and employment are rising, as are house prices and the FTSE.  The biggest negative that The Guardian can point to is the rise in inflation that has been triggered by the post-referendum fall in Sterling.  That could well crimp household spending power in 2017, arresting the expansion of the economy.

Official forecasts from the Office for Budgetary Responsibility concur that growth will slow last year, but no longer think that the economy will be forced into outright recession.  So what do we make of the opinion of Bank of England Governor Mark Carney, that the British economy is in the  midst of its first lost decade since the 1860s, or the Institute for Fiscal Studies' assertions that UK workers face their toughest squeeze on wages since WWII?  The truth is that both of these observations can largely be traced to developments in place well before the referendum, specifically the fiscal squeeze imposed by former PM David Cameron.  Cameron had already put the country through the wringer well before his disastrous and craven decision to hold the Brexit referendum.  History will not be kind.

In economics you can never test counterfactuals, so it will never be possible to know exactly what the impact of the Brexit vote was.  However, it seems reasonable to assert that the longer it takes to come up with some sort of trade deal with the EU, the worse things will be for the UK economy, and the longer the pain will last.  Markets hate uncertainty more than anything, and the Brexit vote, together with the chaotic follow-up by a totally unprepared UK government, has delivered that by the cartload. That lost decade could easily last a whole lot longer.

Sucking and blowing

Here's a surprise.  In its semi-annual Financial Stability Report, released today, the Bank of Canada identifies what it considers to be the most significant risk facing the financial system today: high household debt levels caused by soaring house prices.

So this is unlikely to help.  Just hours after the Bank released its report, the provincial government in British Columbia announced a program to provide interest-free loans to first time buyers who can't come up with a downpayment.  BC is going further than any other province in trying to micro-manage its housing market:  it's just a few months since the government slapped a special tax on foreign buyers, who are blamed for pushing up prices at the top end of the market in Vancouver.  But really, no Canadian government seems able to resist the temptation to mess with housing.  Ontario only recently announced it would increase its existing land transfer tax rebate for first time buyers, also with the stated aim of increasing affordability.  

It's entirely predictable that BC's latest brainwave, like the Ontario tax rebate, will push up overall prices at the lower end of the market, while helping relatively few people to acquire their first home.  And all the while, Governor Poloz and his colleagues at the Bank of Canada must be biting their nails to the quick, as politicians pump the market, and the associated risks,  ever higher.  

Fed up, but no move expected in Canada

As expected, the FOMC today raised its target for the Fed funds rate by 0.25 percent, bringing it to 0.75 percent.  The accompanying statement describes the rate as still "accommodative", which in historical terms it surely is.  The Fed expects to continue to tighten its policy settings in the year ahead, but the statement makes it very clear that the pace of tightening will be entirely data-dependent.  In particular, the FOMC appears likely to focus on the inflation rate, which remains well below its preferred level of 2 percent, despite rising economic activity and a tightening labour market.  Barring a sudden and unexpected uptick in inflation, 2017 seems likely to see rates rising by no more than 25 basis points per quarter.

Meanwhile, back in Ottawa....there is zero possibility that the Bank of Canada will follow the Fed's lead any time soon, despite a gently-rising chorus of voices suggesting it should.  As noted here last week, former Bank of Canada Governor David dodge believes that all central banks should follow the Fed is moving rates in a predictable fashion back to more historically normal levels.  That suggestion, well-argued as it was, seems to have fallen entirely on deaf ears.

Now a former StatsCan economist, Philip Cross, has weighed in on the same subject.  He argues that the need for low rates in Canada largely disappeared in about 2009, when it became clear that Canadian banks were well-capitalized and well-run enough to weather the financial crisis.  What the Bank of Canada is doing right now, he argues, is like "using antibiotics for the common cold".

It's certainly true that there are risks from keeping the low rate environment in place for so long -- it produces distortions in asset markets and leaves few options in the event of another real crisis.  However, Cross's apparent assumption that the only reason for cutting rates was to keep the banks solvent is an oversimplification.  That may have been the initial reason, but even once the stability of the banks was assured, there was still a need to protect the economy from the worst impacts of the crisis as it played out elsewhere, and low rates surely had a role to play in that regard.  It scarcely bears thinking how the Canadian economy would have performed in an environment of rising domestic rates and a strengthening exchange rate.    

That said, there are few signs that the Bank of Canada's "lower for longer" rate policy is working any more.  Low rates were supposed to weaken the dollar -- which they did, at least for a time -- and the weak dollar in turn was supposed to facilitate a "rotation" in the economy, away from dependence on resource extraction.  The sluggish performance of non-oil exports shows that isn't working as planned.

In fact, low rates aren't even providing a boost to activity in interest-sensitive sectors of the economy, such as housing.  This piece from Bloomberg points out that although housing prices in Vancouver and Toronto have been soaring in the low interest rate environment, new homebuilding has been largely stagnant.  Bloomberg seems to want to attribute that to a shortage of appropriately zoned land, and there may be some truth to that in the case of Vancouver.  Overall, however, it is equally plausible to suggest that developers are benefiting from the shortage of property -- the value of each condo they build rises sharply even while the cranes are still on-site -- and so have little incentive to alleviate that shortage by putting up more homes.

Bank of Canada Governor Stephen Poloz knows all of this, which is why he has been an enthusiastic supporter of the Trudeau government's plans for fiscal stimulus.  However, even if monetary policy is largely played-out as a way of boosting domestic growth, the Bank is in no rush to find out what might happen once it embarks on its own course of tightening.

Canada: the non-trading free trader

The Trudeau Government may seem like a lonely advocate for free trade in a world of rapidly closing borders, but here's an odd thing: the importance of trade to Canada's economy has been steadily shrinking in recent decades, despite the Canada-US free trade agreement and NAFTA.  This story from Bloomberg calls Canada "a trading nation that's forgotten how to trade".

In brief,  Canada's goods exports now stand at 31 percent of GDP, down a stunning 14 percentage points since the beginning of the century.  Canada's export growth is the second lowest within the G-20.  Imports are also declining in relative importance, dropping to 34 percent of GDP currently from 38 percent in the year 2000.  This would be a recipe for a full-blown crisis but for the fact that service exports have been increasing strongly in recent years.

The decline in goods exports can in part be blamed on the commodity price boom in the early part of this century, which pushed the exchange rate to a level at which manufactured good exports simply became uncompetitive in foreign markets.  Most experts, including, it appears, the Bank of Canada and the Government, assumed that non-resource exports would bounce back once the currency retreated.  That simply hasn't happened in the past few years, so there must be something else going on, something structural.

Has Canada simply "forgotten how to trade", as the Bloomberg article suggests?  There may be something to that, but it can also be argued that aside from the resource sector, Canadians never really did know how to trade.  Canada's manufacturing exports have always been dominated by branch plants owned by big US companies, including the Big Three automakers and metal-bashing companies like John Deere, rather than by fully Canadian-owned and -managed companies.

Before the Canada-US free trade agreement came along, the so-called "Auto Pact" required the Big Three to maintain a certain level of production in Canada in order to gain tariff-free access to the Canadian market for their US-built product.  The Auto Pact protections disappeared when the free trade deal was made, and the industry's longer-term fate was sealed when the tripartite NAFTA arrangement came along in 1994.  The level of "Canadian" exports always depended largely on decisions made in Detroit;  since NAFTA, those decisions have increasingly favoured investment in Mexico or "right to work" US states rather than in Canada.

The surprise here is that it has taken so long for Canadian policymakers to cotton to the fact that the manufacturing jobs that have been lost are not going to come back just because the exchange rate has weakened. Bloomberg suggests that former Bank of Canada Governor Mark Carney was particularly culpable in this regard, despite warnings from the OECD and elsewhere.  Carney's successor, Stephen Poloz, finally seems to be acknowledging that parts of the export sector are irretrievably lost, which explains his support for more aggressive fiscal policy in an effort to get the economy moving again.  The fact that the Trudeau Government is adopting a much more expansionary fiscal stance suggests that, for all its free trade rhetoric, it too understands that exports are unlikely to provide the growth and employment that they once did.

David Dodge's growth plan

Something that's been evident since the great global experiment with ultra-loose monetary policy began almost a decade ago is that no-one at the major central banks has any clear plan for getting policy back to "normal".  It might have been easy to do so if low rates and QE had quickly restored growth to pre-crisis levels, but of course that didn't happen.  We now have a world of low interest rates, low inflation (apart from asset prices) and stagnant growth, and central banks have little or no ammunition available in the event of another crisis.

Enter, with an important speech last week to the CD Howe Institute in Canada, former Bank of Canada Governor David Dodge.  The media have focused mainly on his call for the Fed, and if possible other central banks, to abandon their current data-driven policy approach, in favour of a pre-announced schedule of rate hikes, designed to bring rates back to a more normal level.  This would certainly create room for easing the next time things head south, but Dodge's rationale is a lot more subtle and complex than that.

Dodge characterizes the macro policy paradigm that served the global economy well from the early 1980s until the onset of the financial crisis as "leaning against the wind".  Monetary policy, and to a lesser extent fiscal policy, were aimed at keeping economies on a path of steady growth and stable inflation.  However, in the past few years, that paradigm has proved ineffective:

"In large part, changing demographics, slower technological progress, and inadequate structural policies have contributed to lower potential growth. In addition, deleveraging by households and banks in the wake of the financial crisis, the structural debt crisis in the eurozone, and the slowdown of trend growth in China are factors that hampered global growth. In addition to lower potential growth, the “natural rate” of interest is lower today than it was in the decade that ended in 2007."

Dodge's explanation for the lower "natural rate" of interest is heavily driven by demographics. An aging population naturally starts to save more, thereby increasing the supply of investible funds. At the same time, that shift from consumption to saving serves to reduce profitable investment opportunities within the economy, driving down the demand for funds. The real "natural rate" of interest may now be 1 percent or even lower, as against 3 percent two decades ago.

One of Dodge's key arguments is that low interest rates, and especially the expectation that they will stay "lower for longer", are now in and of themselves holding back growth, in  a variety of ways.  Low rates work in part by "pulling forward" investment and consumption plans -- borrow while you can afford it -- but if, as is now the case, those low rates are expected to persist indefinitely, that incentive is reduced. Moreover, an aging population sees low rates as a clear signal to save more for retirement.  A low rate, flat yield curve environment makes it difficult for banks to make profitable long-term loans, because mismatching (using short-term deposits to fund longer-term assets) is no longer effective.

To this one could add (though Dodge does not) the demonstration effect of central bank policies themselves. If central banks are constantly signalling their lack of confidence by extending their ultra-loose policy settings, why should consumers or businesses feel confident enough to spend and invest?

Dodge's solution to this dilemma is to throw out the paradigm.  On the monetary policy side, get away from the current data-driven approach and announce a schedule for future rate hikes to get the Fed funds rate up to 1.5-2.0 percent.  To offset the negative impact of such a strategy on economic growth, fiscal policy should be loosened, with a focus on public sector investments designed to boost the longer-term growth potential of the economy.  (Dodge duly notes that this is the approach that the Canadian Federal Government seems to be taking).

It would, of course, be foolhardy for the US to undertake such a course, particularly on the monetary policy side, on its own.  Higher US interest rates, without corresponding moves elsewhere, would inevitably serve to strengthen the US dollar, which would crimp US exports and also pose potentially severe problems for emerging economies.  This is probably the major flaw in Dodge's plan: it all makes good sense, but in a world where governments don't trust one another and central banks prize their independence above all else, how can you ever expect to make it happen?  

In point of fact, something along the lines that Dodge is bravely advocating here may be about to unfold in the US anyway.  Nobody seems to doubt that the Fed will raise rates this month and will continue to tighten through 2017.  On the fiscal side, Republicans always run bigger deficits than Democrats, whatever their campaign rhetoric may have been, and Donald Trump's infrastructure renewal plan seems to be one of the few things that all sides are willing to support.  What's lacking here is any kind of international co-operation, which is something that Trump seems to go out of his way to alienate.  How will a rebalancing of US policies work when most of the rest of the world is sticking to the old paradigm?  We may be going to find out.  

It's all good, on the surface

Canada's economy added 10,800 jobs in November, pushing the unemployment rate down to 6.8 percent.  That's a good thing, right? Well, not exactly.  I've noted here many times that Canada's labour force survey is so volatile as to be almost incomprehensible, but in this case the details point very clearly to one conclusion: the job market is not as healthy as it seems on the surface.

For one thing, all of the new jobs were part-time in nature, as indeed they have been for the past year and more.  For another, the fall in the unemployment rate was almost entirely the result of workers leaving the labour force altogether, which usually means people are giving up looking for work because they have little expectation of finding any.  Then again -- and this is where the unfathomable volatility of this series is so frustrating -- labour force participation had seemed to be improving in recent months, so the decline in November may just be an anomaly, rather than a new, unfavourable trend.

The employment numbers were the second release from StatsCan this week that may not have been quite as good as they first appeared.  On Wednesday the agency reported that GDP grew at a 3.5 percent annualized rate in Q3, way ahead of the analysts' consensus.  Moreover, the wildfire-driven decline in Q2 GDP, originally reported at an annualized 1.6 percent, was revised to 1.3 percent.  The principal driving factor, no surprise here, was a 6.1 percent rebound in energy exports, as the area around Fort McMurray returned to normal activity levels.

What's next?  Probably not more of the same.  Although GDP grew 0.3 percent in September, setting up a strong base for Q4 growth, the improvement in the month was yet again largely down to the energy sector.  Stripping that out, real GDP only rose by 0.1 percent in the month, suggesting yet again that the Bank of Canada's and the government's hopes of seeing the economy rebalance away from its dependence on resource extraction continue to be unfulfilled.

In fact, events may be starting to conspire against that rebalancing happening at all.  This week's OPEC production cut, if it holds (a huge "if") will give a boost to Canada's oil patch.  Just the prospect of that happening has pushed the Canadian dollar back above 75 cents (US), eroding the exchange rate competitiveness that is supposed to give sectors like manufacturing a boost.

And then, of course, there's the Trump factor. The President-elect's condemnation of the NAFTA trade agreement has been mainly aimed at Mexico, but Canada is also a signatory to that deal. There's no realistic possibility that any revision of that deal, assuming that Trump doesn't just cancel it outright, will work in Canada's favour.  In the absence of NAFTA, the US will still be willing to accept Canadian energy exports, albeit in declining amounts as US production continues to ramp up.  For other sectors, however, especially manufacturing, the prospect of a post-NAFTA world is truly worrying.  Bank of Canada Governor Stephen Poloz says it's too soon to tell what the Trump impact on Canada will be.  Maybe so, but it's not too soon to fret about it.