Worthwhile Canadian Initiative

Greece, the Eurozone, and Canada

I have been following the story about Greece. Like some other Eurozone countries, Greece has high deficit/GDP and debt/GDP ratios. Unlike Canada, but like Canadian provinces, Greece cannot print money. Eurozone countries are like Canadian provinces, as I argued in here back in January. But the Eurozone, unlike Canada, lacks a federal fiscal authority. The Eurozone is what Canada would be if we abolished the federal government, except for the Bank of Canada.

I rather stuck my neck out in that January post. I had "poster's regret" soon after. But now I'm looking a lot more prescient than I felt at the time. (Which proves it would be sheer luck, even if I do turn out to be right).

Why can't the Fed just buy yuan?

The title really says it all. And it's not a rhetorical question; I don't know the answer. But if the US is really concerned (H/T Mark Thoma) about the US dollar being too high against China's yuan, and it believes China is "artificially" preventing the yuan from appreciating against the dollar by foreign exchange market intervention, why can't the Fed just intervene in the opposite direction, by buying yuan?

Oil prices in currencies other than the USD

I've received a request to update my irregular series of graphs of movements in oil prices in currencies other than the USD. There's been a certain amount of movement in the oil and forex markets over the past few months, so I'm happy to oblige:

The CAD and the euro have appreciated by about 20% with respect to the USD and the yen since February. And inflation is below target in both Canada and the euro area. So it may not be a coincidence that Willem Buiter's recommendation to the ECB looks a lot like my recommendation to the Bank of Canada.

US travel to Canada and the exchange rate: A textbook case

Via Megan McArdle, I learn that Kevin Drum is puzzled by the drop in day trips by Americans to Canada. Megan is quite right; the exchange rate is the explanation.

I've been teaching from the French translation of Krugman and Obstfeld's International Economics. Unfortunately, it was translated for the European market, so all the examples are about France and the US. So in the section where they introduce exchange rates, they show that US visits to French restaurants vary closely with fluctuations in the USD-Euro exchange rate. I decided to dig up another example that would be more familiar to our students, so here is what I show my students when I want to illustrate how people react to changes in the exchange rate:

How far out of line is the Canadian exchange rate?

No one knows. There is approximately an infinity of exchange rate models out there, and according to the one(s) used at the Bank of Canada, the CAD is over-valued. I don't think anyone will strenuously object to the notion that the CAD is in some sense too high - that is, higher than what most models would predict. But is this gap significantly greater than the normal range of fluctuations that we've seen in the past? And is this gap important enough to induce a change in how the Bank conducts policy?

We'd have a better understanding of this problem if people routinely reported error bands with their estimates (a pet peeve of mine), but they don't. So instead, I'm just going to plot some graphs and do some eyeball econometrics.

Rambling thoughts on Canadian house prices and global savings gluts

This isn't a very focused post. There are two sets of thoughts bubbling through my mind this morning. The first is about Canadian house prices; the second is about global savings gluts. But the two topics are very definitely related.

There is a lot of anecdotal evidence of a pick-up in at least some Canadian housing markets over the last month or two. Like this story in today's Globe and Mail for example, about record sales, bidding wars, and rising prices in Toronto. I won't fully believe that these stories are real and representative of the whole housing market until I see it confirmed by a rise in the Teranet-National Bank price index, but the most recent Teranet numbers are for April, and show no rebound yet. (You can have accurate data or quick data: pick one.)

Talking down the Loonie?

The Loonie (Canadian dollar) has appreciated against the US dollar recently. The Bank of Canada expressed its concern in Thursday's Announcement.

"In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly. If the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset these positive factors."

Can the Bank of Canada "talk down" the Loonie? If exchange rates are determined by fundamentals, it's not clear how talk could matter. But I don't think exchange rates are determined by fundamentals. I think the exchange rate is determined by the forex market's current belief about the Bank of Canada's current and future beliefs about the fundamentals. So talk can matter, because it lets the Bank of Canada let the market know what the Bank of Canada believes.

Oil prices in currencies other than the USD

Once again, we're seeing an increase in USD-denominated oil prices accompanied by a depreciating USD, so it was only a matter of time before someone put 1 and 1 together and got 11:

Crude awakening: It's oil about the US dollar: Some people would have you believe that oil's surge above $60 (U.S.) a barrel is about anticipation of a global economic recovery. Don't be fooled. This isn't about an economy's renaissance, but rather a currency's demise.

Oil's rise has been tracking the U.S. dollar's fall in near lock-step over the past two months...

I guess it's time to update my series of graphs of oil prices in currencies other than the USD:

Oil prices are up in the US - as well as in Canada, Japan and the euro area.

The US may need a financial hegemon. But the US is not the world.

Canadians are federalists by instinct, so my reaction to Dani Rodrik's recommendation to resist the imposition of a global financial regulator with a Procrustean mandate is to nod my head in approval. In the current context, the proper Canadian reaction to such a proposal would be to wonder why on earth ceding authority to a US-dominated - does anyone believe that it would be anything else? - financial regulator would be a good idea.

Brad DeLong may be quite right to think that a global authority might have a better chance of keeping the US in check. But for the rest of us, it looks like a way for the US to drag everyone else down with them.

Unless the US is willing to truly abandon its sovereignty in this matter - and there is nothing in its history to suggest that it would - then this project is doomed to failure.

GDP, GDI, terms of trade and why Canada is in a recession: It's all about the beer and pizza

The Parliamentary Budget Office has released a report (pdf - h/t to Kady O'Malley) that makes note of the distinction between Gross Domestic Product (GDP) and Gross Domestic Income (GDI), and shows that by the latter measure, the fourth quarter of 2008 was even more dreadful than the GDP numbers that made all the headlines.

As a public service, I'm going to explain what the difference is between GDP and GDI and how it relates to the current recession. It starts below the fold, and yes, there will be beer and pizza.