March 30, 2010

Fear of falling: Why the dollar is (thankfully) destined to fall further

Posted in Macroeconomics at 11:06 am by Eamon Aghdasi

Recently I’ve heard people lamenting the weakness of the dollar, and fondly reminiscing about the good-old-days in the 1990s, when the dollar was historically strong against other currencies. I have to admit that even I wish I could go back to just a few years ago when I would drive up to visit my girlfriend (now fiancé) in Montreal, and get a huge plate of Lebanese food for about seven bucks. When your life is largely motivated by the search for cheap delicious food, the weaker dollar has made tourism a serious drag.

Within the past two years the dollar’s value has taken us for a particularly curious ride. Through much of 2008 it actually appreciated, as global investors fled to the safety of the dollar amid financial crisis (one of the few times in history, I imagine, that a country went through a financial crisis and demand for its currency actually increased). Then dating back to about 12 months ago it started a steep decline, and that’s when the exchange rate panickers came out again in full force.

When it comes to public perceptions, exchange rates constitute one of the worst-understood topics in economics. Many bright people fall into the trap of thinking “strong dollar: good; weak dollar: bad”. The simple truth is that weak can be as good or better than strong, depending on what you want or what you need . If you want to buy lots of foreign goods, then strong dollar: good. If you want to sell more of your goods and services to foreigners, then it’s actually weak dollar: good. In reality, a free market does a great job of getting you to a not-too-strong, not-too-weak equilibrium of the value of a country’s currency. (Of course, if you’re a small developing country with an inflation problem, then there are other factors at play.)

Despite the decline in the value of the dollar against most currencies over the past ten years or so, I personally believe there is still no way to go but down from here for the next ten. The rest of this blog is about explaining a) why I feel that way, and b) why this is actually a good thing.

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February 2, 2010

The Popular Thing to Do

Posted in Macroeconomics at 12:45 am by Eamon Aghdasi

It’s rare that the right thing to do economically is also the popular thing in the eyes of the general populace. But that’s exactly what seems to be the case with some of the proposed banking reforms. So why isn’t reform easier?

The proposed financial reforms announced by President Obama — including new rules  to limit the size of “too big to fail” banks that create moral hazard — has been casually referred to by commentators in TV and print as “populist”. The most common argument is that now that the Democrats lost the special senate election in Massachusetts, they’ve got to pander to the American public by demonizing the easy-target banks. But now there are a handful of people challenging this, arguing that just because something is popular, that doesn’t make it populist.

One of those people is Simon Johnson, former chief economist at the International Monetary Fund who’s now at MIT Sloan (where else). He wrote in Baseline Scenario recently:

“The fact that dramatic banking reforms would be popular does not make them populist.  It merely means that a broad cross-section of our population has woken up to part of our appalling reality.  Sure, they are angry – but with good reason, and the remedies they seek are entirely appropriate.” (Full entry here.)

I don’t want to make this blog a political forum, but I have to unequivocally side with Simon Johnson 100% on this one. He’s been right on this issue for months. The president is now experiencing a policy that has that rare combination of overwhelming popular support  and actual policy integrity. People are angry at the near-fatal financial collapse and the enormous bail-out and stimulus funds needed to avoid an economic cataclysm. Now we have nearly every famous economist making the case that without serious financial reform, we’re bound to face a “doom loop” of collapse and bailout until the problem is fixed.

So don’t call this particular popular policy “populist”. There are plenty of policy ideas floating around — even in this country — that deserve that tag.

The only question is: If financial reform is both politically and economically smart, why isn’t it a sure thing? To understand this one, consider that by some estimates the biggest four American banks now hold about half of the nation’s deposits and two-thirds of credit card balances. Then read my last entry.

September 29, 2009

Economic forecasting with household items

Posted in Macroeconomics at 5:44 pm by Eamon Aghdasi

For a while I’ve wanted to just do a quick forecast of employment with “household” items (basically anything you can find on the web). So I took a stab at it. The basic question I sought to answer was what the quarterly employment change (change in seasonally-adjusted, non-farm payroll employment) will be in six months.

Why is this interesting? Well, if you look at the last few months’ worth of employment change data, it’s tough to figure out just what the next few months have in store. Job losses seamed to peak (or trough, whatever) back in January, when the US economy lost about 741,000 jobs on a seasonally adjusted basis. In the next four months we saw this number steadily decline to just 303,000 in May, and everyone got excited. Then the next month it jumped back up to 463,000 in job losses, still a devastating number and pretty disappointing for those that hoped we’d reemerge into positive territory soon.

Now I feel that analysts don’t really know what to expect from the next few months. Will we continue to shed employment at a lower level for much of 2010? Will the numbers reach into slightly positive territory or hover around zero for a while, at a pace of growth slower than that of the labor force? Or will employment rebound strongly in the next few months, enough to bring down the unemployment rate? (Unfortunately, not many people seem to believe in this last scenario.)

emp_change_forecast_workbook

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