Media reporting on Canada's Q1 GDP data, released by Statistics Canada this morning, has mostly focused on the negatives. GDP rose only 0.1 percent quarter-to-quarter, the same pace as in the final quarter of 2018, making this the weakest half year of growth since 2015. However, the data were hardly surprising, given the frequent warnings from the Bank of Canada that the economy was going through a weak patch, and a look beyond the headline showed plenty of were plenty of positives.
From a growth standpoint, the main source of weakness in Q1 was the external sector. In volume terms, exports fell by 1 percent in the quarter, while imports rose 1.9 percent. There was also a 1.6 percent decline in residential construction investment. However, there was a 0.9 percent real increase in household spending -- which makes sense, given the strong gains in employment seen in recent months -- and an 8.7 percent leap in business investment. Business inventory accumulation, both farm and non-farm, also exerted a positive influence. StatsCan notes that one big driver of inventory accumulation was a rise in cannabis stocks, in advance of the full legalization of the product in April.
While keeping rates on hold this week, the Bank of Canada expressed confidence that the slow patch in the economy was coming to an end. Monthly GDP data for March, also released by StatsCan this morning, appeared to confirm this. After falling 0.2 percent in February, real GDP rebounded by 0.5 percent in March. The recovery was very broad-based, with gains in manufacturing, mineral extraction and services all contributing. This strong "hand-off" at the end of Q1 will go a long way toward ensuring that Q2 GDP data show significantly faster growth than in the past two quarters.
There are still headwinds, mostly on the trade front. Donald Trump's insane trade wars show no sign of winding down, with the White House threatening Mexico with tariffs even as it presses for the ratification of the NAFTA replacement. Moreover, Canada has trade problems of its own with China, centred on the detention of a senior executive of Huawei in response to a US extradition request. China has responded by cutting back on imports from Canada, mainly in the agricultural sector. Even if the economy does move ahead more strongly in Q2 and in the second half of the year, there is no prospect of any change in Bank of Canada policy until some time in 2020.
Friday, 31 May 2019
Tuesday, 28 May 2019
Canadian seniors in debt
Despite years of warnings from the Bank of Canada and others, Canadians' addiction to debt shows no sign of waning. A new report from Canada Mortgage and Housing Corporation (CMHC) shows that the ratio of household debt to income hit a new record high of 178.5 percent in the final quarter of 2018.
There were some signs of moderation (or pullback) in the housing market during the course of the year. The number of transactions and the average price were both lower than in 2017 as tighter mortgage eligibility rules began to bite. The average size of new mortgage loans declined by just under 4 percent, though the average value of all outstanding mortgages actually rose by 3 percent.
The rise in the debt/income ratio is mainly attributable to continuing growth in non-mortgage debt. CMHC reports that mortgage borrowers' non-mortgage borrowings (mainly via credit cards and the pernicious Home Equity Lines of Credit, or HELOCs) rose faster in 2018 than in the preceding year. This was particularly noticeable in Vancouver and Toronto, where homeowners were cashing in on the rising equity in their homes, but also, more surprisingly, in Edmonton, where the travails of the energy sector may have forced some homeowners' hands.
Encouragingly, CMHC reports that overall delinquency rates remain low, but the report does draw attention to one worrisome trend. Over the past four years, the age cohort that has shown the most rapid rise in delinquency rates is the over-65s -- yes, the good old baby boom generation. It used to be rare for people to carry mortgage debt into their retirement years, but the self-indulgent boomers have put an end to that. The airwaves are full of offers to encumber the family homestead in order to keep that unaffordable lifestyle in place just a few years longer -- "let your home lend a hand", as one such advertisement has it.
In effect the boomers (my own cohort) are distorting the housing market six ways to Sunday. Some are setting up "The Bank of Mom and Dad" to get the kids on the housing ladder, which mainly serves to keep prices artificially high. Some are staying in their homes for many years longer than used to be customary because of the lack of affordable and desirable smaller accommodation. And some are loading debt onto the family home, a sure-fire way of robbing the kids of their inheritance. It's little wonder that younger generations, watching their elders refuse to go gentle into that good night, expect to have a lower living standard than their parents.
There were some signs of moderation (or pullback) in the housing market during the course of the year. The number of transactions and the average price were both lower than in 2017 as tighter mortgage eligibility rules began to bite. The average size of new mortgage loans declined by just under 4 percent, though the average value of all outstanding mortgages actually rose by 3 percent.
The rise in the debt/income ratio is mainly attributable to continuing growth in non-mortgage debt. CMHC reports that mortgage borrowers' non-mortgage borrowings (mainly via credit cards and the pernicious Home Equity Lines of Credit, or HELOCs) rose faster in 2018 than in the preceding year. This was particularly noticeable in Vancouver and Toronto, where homeowners were cashing in on the rising equity in their homes, but also, more surprisingly, in Edmonton, where the travails of the energy sector may have forced some homeowners' hands.
Encouragingly, CMHC reports that overall delinquency rates remain low, but the report does draw attention to one worrisome trend. Over the past four years, the age cohort that has shown the most rapid rise in delinquency rates is the over-65s -- yes, the good old baby boom generation. It used to be rare for people to carry mortgage debt into their retirement years, but the self-indulgent boomers have put an end to that. The airwaves are full of offers to encumber the family homestead in order to keep that unaffordable lifestyle in place just a few years longer -- "let your home lend a hand", as one such advertisement has it.
In effect the boomers (my own cohort) are distorting the housing market six ways to Sunday. Some are setting up "The Bank of Mom and Dad" to get the kids on the housing ladder, which mainly serves to keep prices artificially high. Some are staying in their homes for many years longer than used to be customary because of the lack of affordable and desirable smaller accommodation. And some are loading debt onto the family home, a sure-fire way of robbing the kids of their inheritance. It's little wonder that younger generations, watching their elders refuse to go gentle into that good night, expect to have a lower living standard than their parents.
Friday, 24 May 2019
She had one job
I was watching a Canadian news program this morning in the aftermath of Theresa May's resignation announcement in London. The newscaster was talking with Professor Tim Bale from Queen Mary University of London. After Bale had given a quick rundown on what had just happened and what might be coming next, the interviewer asked the inevitable question: it's early days, of course, but how is history likely to treat May's tenure?
The good professor did not hold back. May had abjectly botched the one main task she had -- delivering Brexit -- thanks in the main to her insistence on taking a totally partisan approach rather than attempting to build any sort of consensus. Aside from Brexit, said Prof. Bale, the list of accomplishments May could point too was desperately thin. History would judge her Prime Ministership as one of the worst in UK history.
The interviewer looked genuinely shocked. "Wow! That's harsh", she said. Indeed it is, but can anyone say that Prof. Bale is wrong?
May grabbed the job with both hands in the aftermath of David Cameron's disastrous 2016 referendum, when the two most obvious candidates for the job -- Boris Johnson and Michael Gove -- basically knifed each other in the back. She took on the task of delivering Brexit even though she herself had been a remainer. Instead of attempting to define Brexit in a way that might have started to reunite the country, she chose to utter the memorable but vacuous phrase -- "Brexit means Brexit" -- that came to echo through the rest of her disastrous tenure.
When May took over from Cameron, the Tory party had a majority in the House of Commons, and under the UK's freshly-minted fixed terms law, no election was required until 2019. Instead of using her control of the Commons to move things ahead, May chose to call an early election. This resulted in the Tories losing their majority. In order to remain in government they were forced to make an alliance with the unlovely Democratic Unionist Party from Northern Ireland, the only political grouping in the UK that makes the Conservative Party look modern.
Hamstrung by the demands of the DUP, May set out a series of mutually incompatible "red lines" for negotiations with the EU, Basically the UK was seeking to cherry-pick the bits of the EU relationship it liked while walking away from the rest, an approach which the EU warned from the outset would not succeed.
By the end of 2018, an exit deal of sorts was somehow cobbled together, but drew praise from almost no-one in UK politics when the details were unveiled. May attempted, in defiance of parliamentary precedent, to ram the deal through the Commons on three separate occasions, each time meeting an ignominious defeat. She was preparing to make a fourth attempt when her party finally managed to persuade her that the jig was up, paving the way for this morning's teary announcement.
What next? The Tories will pick a new leader in the coming weeks. A large number of candidates are already girding up to compete, but the race is probably Boris Johnson's to lose. The winner, whoever it may be, will be a hard Brexiteer who will undoubtedly try to get a better deal out of Brussels. There is unlikely to be much appetite for that within the EU, so the best bet is that the UK will leave the EU without a deal on October 31. After that, just maybe, saner voices will be heard and an orderly arrangement for future relations will be drawn up.
Theresa May is perhaps not the worst UK Prime Minister ever -- David Cameron may still own that title, as the feckless dolt who triggered this whole mess. Still, I'm with Professor Bale in stating that she will not be treated kindly by historians. As a political obituary, this little couplet from the left-wing band Chumbawamba, now sadly broken up, is hard to beat:
"You had no friends, you won't be missed.
I'm here to tell you that you don't exist".
Pretty much.
The good professor did not hold back. May had abjectly botched the one main task she had -- delivering Brexit -- thanks in the main to her insistence on taking a totally partisan approach rather than attempting to build any sort of consensus. Aside from Brexit, said Prof. Bale, the list of accomplishments May could point too was desperately thin. History would judge her Prime Ministership as one of the worst in UK history.
The interviewer looked genuinely shocked. "Wow! That's harsh", she said. Indeed it is, but can anyone say that Prof. Bale is wrong?
May grabbed the job with both hands in the aftermath of David Cameron's disastrous 2016 referendum, when the two most obvious candidates for the job -- Boris Johnson and Michael Gove -- basically knifed each other in the back. She took on the task of delivering Brexit even though she herself had been a remainer. Instead of attempting to define Brexit in a way that might have started to reunite the country, she chose to utter the memorable but vacuous phrase -- "Brexit means Brexit" -- that came to echo through the rest of her disastrous tenure.
When May took over from Cameron, the Tory party had a majority in the House of Commons, and under the UK's freshly-minted fixed terms law, no election was required until 2019. Instead of using her control of the Commons to move things ahead, May chose to call an early election. This resulted in the Tories losing their majority. In order to remain in government they were forced to make an alliance with the unlovely Democratic Unionist Party from Northern Ireland, the only political grouping in the UK that makes the Conservative Party look modern.
Hamstrung by the demands of the DUP, May set out a series of mutually incompatible "red lines" for negotiations with the EU, Basically the UK was seeking to cherry-pick the bits of the EU relationship it liked while walking away from the rest, an approach which the EU warned from the outset would not succeed.
By the end of 2018, an exit deal of sorts was somehow cobbled together, but drew praise from almost no-one in UK politics when the details were unveiled. May attempted, in defiance of parliamentary precedent, to ram the deal through the Commons on three separate occasions, each time meeting an ignominious defeat. She was preparing to make a fourth attempt when her party finally managed to persuade her that the jig was up, paving the way for this morning's teary announcement.
What next? The Tories will pick a new leader in the coming weeks. A large number of candidates are already girding up to compete, but the race is probably Boris Johnson's to lose. The winner, whoever it may be, will be a hard Brexiteer who will undoubtedly try to get a better deal out of Brussels. There is unlikely to be much appetite for that within the EU, so the best bet is that the UK will leave the EU without a deal on October 31. After that, just maybe, saner voices will be heard and an orderly arrangement for future relations will be drawn up.
Theresa May is perhaps not the worst UK Prime Minister ever -- David Cameron may still own that title, as the feckless dolt who triggered this whole mess. Still, I'm with Professor Bale in stating that she will not be treated kindly by historians. As a political obituary, this little couplet from the left-wing band Chumbawamba, now sadly broken up, is hard to beat:
"You had no friends, you won't be missed.
I'm here to tell you that you don't exist".
Pretty much.
Friday, 17 May 2019
Trump tariff shocker!
Just a few days ago Donald Trump was bragging on Twitter about how the steel and aluminum tariffs he imposed during the NAFTA renegotiations last year were creating huge benefits for the United States. "Steel is BOOMING", he opined. Others were warning that retaliatory tariffs imposed by Canada and Mexico were raising the price of a wide range of consumer goods -- an extra $100 on the average washing machine, for example -- but Trump sees and hears only what he wants to see and hear.
Lo and behold, after days of rumours, the Government of Canada announced this morning that the US, Canada and Mexico had reached a deal whereby all three countries would remove their tariffs on one another's steel and aluminum, while also implementing an enhanced monitoring system to ensure that other countries (guess who) don't try to game the system in order to gain access to the US market.
That makes two smart-ish trade moves by Trump in a single week. Just days ago he decided to defer threatened tariffs in European and Japanese cars, which had been based on the same wholly spurious "national security" grounds as the metals tariffs, by six months.
Mexico had directly threatened not to ratify the new USMCA deal as long as the tariffs remained in place. Canada, which is calling the deal CUSMA, had been quietly pondering the same course of (in)action. Both countries may now move ahead with ratification, but the eventual replacement of NAFTA by the new deal is by no means certain.
US Democrats have declared the deal a non-starter, ostensibly because they do not believe the labour and environmental provisions are strong enough, but more truthfully because they don't want to give Trump a big win on the economy -- already his strong suit in the minds of many voters -- with the 2020 election on the horizon. Still, the removal of the steel tariffs is welcome news, a rare sign that the Trump people can sometimes be persuaded to act in everyone's best interests.
Lo and behold, after days of rumours, the Government of Canada announced this morning that the US, Canada and Mexico had reached a deal whereby all three countries would remove their tariffs on one another's steel and aluminum, while also implementing an enhanced monitoring system to ensure that other countries (guess who) don't try to game the system in order to gain access to the US market.
That makes two smart-ish trade moves by Trump in a single week. Just days ago he decided to defer threatened tariffs in European and Japanese cars, which had been based on the same wholly spurious "national security" grounds as the metals tariffs, by six months.
Mexico had directly threatened not to ratify the new USMCA deal as long as the tariffs remained in place. Canada, which is calling the deal CUSMA, had been quietly pondering the same course of (in)action. Both countries may now move ahead with ratification, but the eventual replacement of NAFTA by the new deal is by no means certain.
US Democrats have declared the deal a non-starter, ostensibly because they do not believe the labour and environmental provisions are strong enough, but more truthfully because they don't want to give Trump a big win on the economy -- already his strong suit in the minds of many voters -- with the 2020 election on the horizon. Still, the removal of the steel tariffs is welcome news, a rare sign that the Trump people can sometimes be persuaded to act in everyone's best interests.
Saturday, 11 May 2019
"Where is the money to come from?"
My boss back in my bank economics days was an ardent Keynesian. He would regularly wheel out an anecdote about Keynes discussing reconstruction of London after World War II with an anxious architect. The story was in fact told by Keynes himself, in an article in the venerable BBC magazine, The Listener.
The architect was worried about where the resources would be found for the massive rebuilding that would be needed. Keynes, in his telling of it, asked the architect if there would be bricks and steel available. The architect said their would. Skilled and unskilled labour? Yes to that too. So, said Keynes, what is the problem? Well, said the architect, "Where is the money to come from?"
It was a central part of Keynes's world view that capitalist economies would always have a tendency to operate at less than full capacity, with the result that living standards would be lower than they needed to be. This drove his belief that governments should be prepared to borrow and spend in order to boost demand.
Recall that Keynes's General Theory was very much a product of the Great Depression, and that Keynes was surrounded by evidence of unutilized resources and the consequent poverty. The policy response had been inept at best and damaging at worst. Explaining how the Depression was finally brought to an end, the post-Keynesian economist Axel Leijonhufvud once wrote "sad to say, Schicklgruber did it".
Fast forward to today and we find a newish answer to the architect's question, in the form of Modern Monetary Theory (MMT). The central tenet of many MMT proponents is that for any country that controls its own money supply, public debt can never be considered a burden, because the monetary authority can always create the money needed to service it or pay it off. It might be likened to Keynesianism on steroids: Keynes himself saw borrowing as a counter-cyclical tool, with the debt to be paid down when the economy overheated, but MMT, at least in some readings, sees no such constraint.
Can things really be so simple, and if so, how has it taken economists so long to figure it out? This excellent article by George Selgin attempts to show the possible flaws in the MMT approach. Specifically, he argues that removing the monetary constraint does little to alleviate constraints on the mobilization of real resources. Writing in 1936, it was obvious to Keynes that there would be little risk and much reward in using government borrowing to boost the economy. In today's world of near-record low unemployment, is it really possible to say the same?
Selgin pays particular heed to the so-called Green New Deal (GND), many of whose proponents are also, unsurprisingly, big fans of MMT. He asks, "Is it plausible that programs costing 34 percent of current US GDP can be financed without running up against those pesky real resource constraints, or by exceeding them only by a tolerable margin? I very much doubt it, which is another way of saying that I doubt that GND can be paid for without diverting substantial amounts of presently-employed real resources from their current uses."
Selgin goes on to quote another economist, Josh Barro: "If the government prints and spends money when the economy is at or near full employment, MMT counsels (correctly) that this will lead to inflation, and prescribes deficit-reducing tax increases to reduce aggregate demand and thereby control inflation."
The US economy is unarguably "at or near full employment" at this time. What's more, the Trump administration is already spending borrowed money at a torrid pace, though I'd guess that the Orange One himself is unfamiliar with MMT. As Selgin points out, there's plenty to like about Modern Monetary Theory: its description of how money is actually created in the modern economy is more accurate than the conventional economics version. However, in the world we live in, over-enthusiastic reliance on MMT precepts, be it for the Green New Deal or anything else, seems like a recipe for a return to the bad old days of high inflation.
The architect was worried about where the resources would be found for the massive rebuilding that would be needed. Keynes, in his telling of it, asked the architect if there would be bricks and steel available. The architect said their would. Skilled and unskilled labour? Yes to that too. So, said Keynes, what is the problem? Well, said the architect, "Where is the money to come from?"
It was a central part of Keynes's world view that capitalist economies would always have a tendency to operate at less than full capacity, with the result that living standards would be lower than they needed to be. This drove his belief that governments should be prepared to borrow and spend in order to boost demand.
Recall that Keynes's General Theory was very much a product of the Great Depression, and that Keynes was surrounded by evidence of unutilized resources and the consequent poverty. The policy response had been inept at best and damaging at worst. Explaining how the Depression was finally brought to an end, the post-Keynesian economist Axel Leijonhufvud once wrote "sad to say, Schicklgruber did it".
Fast forward to today and we find a newish answer to the architect's question, in the form of Modern Monetary Theory (MMT). The central tenet of many MMT proponents is that for any country that controls its own money supply, public debt can never be considered a burden, because the monetary authority can always create the money needed to service it or pay it off. It might be likened to Keynesianism on steroids: Keynes himself saw borrowing as a counter-cyclical tool, with the debt to be paid down when the economy overheated, but MMT, at least in some readings, sees no such constraint.
Can things really be so simple, and if so, how has it taken economists so long to figure it out? This excellent article by George Selgin attempts to show the possible flaws in the MMT approach. Specifically, he argues that removing the monetary constraint does little to alleviate constraints on the mobilization of real resources. Writing in 1936, it was obvious to Keynes that there would be little risk and much reward in using government borrowing to boost the economy. In today's world of near-record low unemployment, is it really possible to say the same?
Selgin pays particular heed to the so-called Green New Deal (GND), many of whose proponents are also, unsurprisingly, big fans of MMT. He asks, "Is it plausible that programs costing 34 percent of current US GDP can be financed without running up against those pesky real resource constraints, or by exceeding them only by a tolerable margin? I very much doubt it, which is another way of saying that I doubt that GND can be paid for without diverting substantial amounts of presently-employed real resources from their current uses."
Selgin goes on to quote another economist, Josh Barro: "If the government prints and spends money when the economy is at or near full employment, MMT counsels (correctly) that this will lead to inflation, and prescribes deficit-reducing tax increases to reduce aggregate demand and thereby control inflation."
The US economy is unarguably "at or near full employment" at this time. What's more, the Trump administration is already spending borrowed money at a torrid pace, though I'd guess that the Orange One himself is unfamiliar with MMT. As Selgin points out, there's plenty to like about Modern Monetary Theory: its description of how money is actually created in the modern economy is more accurate than the conventional economics version. However, in the world we live in, over-enthusiastic reliance on MMT precepts, be it for the Green New Deal or anything else, seems like a recipe for a return to the bad old days of high inflation.
Friday, 10 May 2019
Canada April employment data: WOW!
When Statistics Canada reported that the Canadian economy shed about 7,000 jobs in March, it was easy to assume that the employment market was finally starting to reflect the slowdown in GDP growth that became evident late in 2018. As one perspicacious prognosticator (well, me) put it, "it would not be a surprise if gains in employment in the next few months are limited at best."
Can I take a mulligan there please? This morning StatsCan reported that employment in April grew by 107,000, the largest-ever monthly increase in the series, which dates back to 1976. There were gains in full-time jobs, up 73,000 in the month, and a big increase in part-time youth employment. Most of the new jobs -- 84,000 -- were in the private sector. The unemployment rate ticked down to 5.7 percent.
Looked at on a year-on-year basis, the numbers are if anything even more striking. The economy has added 426,000 jobs, a 2.3 percent gain, over the past twelve months. Fully 248,000 of those jobs are full-time, and the total number of hours worked has risen by 1.3 percent from a year ago. Possibly significant from the Bank of Canada's perspective is that wages are starting to move higher again. After somewhat surprisingly drifting lower in the second half of 2018, the year-on-year wage gain has moved up to 2.5 percent.
It's frankly difficult to square these numbers with the widespread perceptions that the economy is going through a sticky patch. Bay Street analysts, never able to resist the temptation to read too much into a single data point, are talking about an economy with "a spring in its step", and "a solid message that employers still have faith in the Canadian economy". The continuing strength in the US economy and jobs market certainly holds out hope that such may be the case, unless everything gets derailed by Trump's trade temper tantrums. Then again, given the wild volatility that Canadian jobs numbers have shown so many times in the past, it wouldn't be wise to see today's numbers as the start of a new trend.
Can I take a mulligan there please? This morning StatsCan reported that employment in April grew by 107,000, the largest-ever monthly increase in the series, which dates back to 1976. There were gains in full-time jobs, up 73,000 in the month, and a big increase in part-time youth employment. Most of the new jobs -- 84,000 -- were in the private sector. The unemployment rate ticked down to 5.7 percent.
Looked at on a year-on-year basis, the numbers are if anything even more striking. The economy has added 426,000 jobs, a 2.3 percent gain, over the past twelve months. Fully 248,000 of those jobs are full-time, and the total number of hours worked has risen by 1.3 percent from a year ago. Possibly significant from the Bank of Canada's perspective is that wages are starting to move higher again. After somewhat surprisingly drifting lower in the second half of 2018, the year-on-year wage gain has moved up to 2.5 percent.
It's frankly difficult to square these numbers with the widespread perceptions that the economy is going through a sticky patch. Bay Street analysts, never able to resist the temptation to read too much into a single data point, are talking about an economy with "a spring in its step", and "a solid message that employers still have faith in the Canadian economy". The continuing strength in the US economy and jobs market certainly holds out hope that such may be the case, unless everything gets derailed by Trump's trade temper tantrums. Then again, given the wild volatility that Canadian jobs numbers have shown so many times in the past, it wouldn't be wise to see today's numbers as the start of a new trend.
Monday, 6 May 2019
Trump's trade theories: curiouser and curiouser
It's not news that Donald Trump's ignorance about economics is practically limitless. Even so, the sheer idiocy of his claims on Twitter this morning about the impact of his tariffs on imports from China is quite staggering. The tweets in question are included in this piece from the BBC website.
According to Trump, China has been paying tariffs ranging from 10 to 25 percent on a variety of goods it ships to the US. Nobody seems to be able to cure Trump of this misunderstanding. The tariffs are paid by US consumers, and analysts are increasingly able to quantify the results. It appears that the average cost of a washing machine in the US has gone up by about $100 as a result of tariffs, including the levies on steel that Trump applied as part of the NAFTA renegotiations. Those tariffs remain in place even though the new deal has supposedly been agreed.
There's nothing new there, but the next statement from Trump is outright jaw-dropping: "These payments are partially responsible for our great economic results". Wait, what? Forcing American consumers to pay more for imported goods directly reduces their purchasing power. That can only serve to crimp consumer spending, which is the main driver of the US economy. If Trump follows through on his threat to boost the tariffs at the end of this week, the impact on the consumer -- and on businesses such as Walmart that source a lot of their product from China -- will be severe.
Trump may not get this, but Wall Street does. US stocks had been on a tear since the start of the year, with the S&P up by 17 percent on hopes that a trade deal with China was imminent. Today's Trump tweets promptly put the markets into reverse. Trump has been quick to take credit for the stock market's performance during his term in office. It's unlikely that he'll step up to take the blame if his idiotic trade policies put an end to the bull run.
According to Trump, China has been paying tariffs ranging from 10 to 25 percent on a variety of goods it ships to the US. Nobody seems to be able to cure Trump of this misunderstanding. The tariffs are paid by US consumers, and analysts are increasingly able to quantify the results. It appears that the average cost of a washing machine in the US has gone up by about $100 as a result of tariffs, including the levies on steel that Trump applied as part of the NAFTA renegotiations. Those tariffs remain in place even though the new deal has supposedly been agreed.
There's nothing new there, but the next statement from Trump is outright jaw-dropping: "These payments are partially responsible for our great economic results". Wait, what? Forcing American consumers to pay more for imported goods directly reduces their purchasing power. That can only serve to crimp consumer spending, which is the main driver of the US economy. If Trump follows through on his threat to boost the tariffs at the end of this week, the impact on the consumer -- and on businesses such as Walmart that source a lot of their product from China -- will be severe.
Trump may not get this, but Wall Street does. US stocks had been on a tear since the start of the year, with the S&P up by 17 percent on hopes that a trade deal with China was imminent. Today's Trump tweets promptly put the markets into reverse. Trump has been quick to take credit for the stock market's performance during his term in office. It's unlikely that he'll step up to take the blame if his idiotic trade policies put an end to the bull run.
Wednesday, 1 May 2019
Fed ignores Trump's tweets
As expected, the US Federal Reserve kept its funds target range unchanged at 2.25-2.50 percent at the end of today's FOMC session. The decision was unanimous. The FOMC statement noted that employment remains strong, while inflation is running just below the 2 percent target and inflation expectations remain well-anchored. In view of the domestic and international economic situation and muted inflation pressures, the Fed promises to be "patient" in determining future rate moves.
One place where there is little inclination to be "patient" about Fed policy is, no surprise, the Oval Office. The Fed has raised rates eight times since Donald Trump took office, and Trump has become steadily more irate about the central bank's independence. In truth, it can with hindsight be argued that the Fed could have eased up on the brakes just a little. The absence of wage and price pressures suggests that the economy, and particularly the jobs market, can operate closer to full capacity than was the case in the past. That said, at its current level the funds rate remains very low by historical standards, and Chairman Jerome Powell and his colleagues can hardly be accused of endangering the economy, at least not by anyone who actually knows what he is talking about.
One interesting angle to Trump's most recent tweets about the Fed is that he seems to have some vague idea that his insane fiscal policy may become something to worry about. In calling for the Fed to cut rates and resume quantitative easing this week, Trump claimed such moves would send the economy up "like a rocket" and at the same time, "make our national debt start to look small". That's doubtful: it has been calculated that the deficits run by the US since Trump took office, driven by his tax cuts, would have fully paid for the entire US effort in World War II, after making the necessary inflation adjustments.
In any case, it's unlikely that the FOMC paid serious attention to this, except maybe during their coffee break. Still, it's worth noting, because Republicans habitually only gripe about government borrowing and debt when it's Democrats who are doing the spending. Just who put this thought in the President's ear?
One place where there is little inclination to be "patient" about Fed policy is, no surprise, the Oval Office. The Fed has raised rates eight times since Donald Trump took office, and Trump has become steadily more irate about the central bank's independence. In truth, it can with hindsight be argued that the Fed could have eased up on the brakes just a little. The absence of wage and price pressures suggests that the economy, and particularly the jobs market, can operate closer to full capacity than was the case in the past. That said, at its current level the funds rate remains very low by historical standards, and Chairman Jerome Powell and his colleagues can hardly be accused of endangering the economy, at least not by anyone who actually knows what he is talking about.
One interesting angle to Trump's most recent tweets about the Fed is that he seems to have some vague idea that his insane fiscal policy may become something to worry about. In calling for the Fed to cut rates and resume quantitative easing this week, Trump claimed such moves would send the economy up "like a rocket" and at the same time, "make our national debt start to look small". That's doubtful: it has been calculated that the deficits run by the US since Trump took office, driven by his tax cuts, would have fully paid for the entire US effort in World War II, after making the necessary inflation adjustments.
In any case, it's unlikely that the FOMC paid serious attention to this, except maybe during their coffee break. Still, it's worth noting, because Republicans habitually only gripe about government borrowing and debt when it's Democrats who are doing the spending. Just who put this thought in the President's ear?
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