Sunday 26 August 2007

Monetary Policy Article

Tim Shaughnessy: Effectiveness of Fed's monetary policy debatable
August 25, 2007

News reports about the Federal Reserve generally do not make the front page but if you sifted past the headlines you saw that the Fed cut the "discount rate." Since people refer to the chair of the Fed as the second most powerful person in the world, it might be helpful to unpack some of the details of the Fed's latest move to see how it affects the economy.

The primary purpose of the Fed is to maintain a sound monetary system leading to low inflation and unemployment, while ensuring smooth and trustworthy operation of banks and financial transactions. In short, the Fed's role is to control the money supply. If it injects more money into the economy, this tends to temporarily spur production of goods and services; in the long run, though, too much money will lead to inflation. If the economy heats up and inflation is looming, the Fed will pull money out of circulation, leading to lower prices but less production.

In the Fed's role as a "bankers' bank," it can change the money supply using the discount rate. In a similar way that I have an account at AmSouth, AmSouth has an account at the Fed. I can borrow money from AmSouth; AmSouth can borrow from the Fed. AmSouth charges me an interest rate when I borrow; the Fed charges AmSouth to borrow, and it calls this rate the discount rate.

The official announcement said the rate was cut "50 basis points," which is just a fancy way of saying half a percent. (Like all economists, the Fed sounds smart when it renames already familiar terms.) Thus, it is now half a percent cheaper for banks to borrow money from the Fed. They borrow more and turn around and lend it out so the money supply increases, which hopefully causes more production of goods and services.

Why did the Fed do this now? "To promote the restoration of orderly conditions in financial markets," according to its press release. The sub-prime mortgage market woes threaten to put the brakes on the economy, so the Fed cut the discount rate as an antidote. The stock market seemed to appreciate the move as the Dow, Nasdaq, and S&P 500 all moved up about 2 percent, reflecting investors' optimism that the easier lending by banks will help the economy.

There is much debate within economics about the effect and effectiveness of monetary policy, with some believing that the Fed is good at fighting inflation but not so good at preventing recessions, and some who think the Fed cannot affect output at all in the long run. We will have to wait and see whether the discount rate cut was the right medicine.

Sunday 19 August 2007

International Econ Commentary Article

Anti-trade backlash would hurt the world's most vulnerable people
Vancouver Sun
Published: Monday, August 13, 2007
The growth in international trade and the consequent increase in imports of tainted goods -- from E.coli-infected spinach from the United States to toxic lead-coated toys from China -- pose more than a health risk. They threaten to jeopardize support for a liberalized global trading regime that represents the only viable hope for many developing nations to raise their standards of living.

In the U.S., Democratic presidential hopefuls are attacking trade at every turn to appeal to the labour vote.

New York Senator Hillary Clinton has registered her opposition to a trade deal with South Korea and, more seriously for Canada, says the North American Free Trade Agreement "has hurt America." She wants to see "broad reform" in how the U.S. approaches trade. "I believe in smart trade, pro-American trade, trade that has labour and environmental standards, trade that's not a race to the bottom," Clinton told a forum in Chicago hosted by the AFL-CIO.

Former North Carolina senator John Edwards vowed to fight trade deals that don't benefit American workers. "While economists say that trade helps our economy over-all, we need to be honest about the fact that it does not help everyone," he told a crowd in Cedar Rapids, Iowa. "Globalization has helped stunt the growth in wages for American workers."

Other contenders, including Barack Obama, agreed that they would revise NAFTA. "Our trade agreements should not just be good for Wall Street, it should also be good for Main Street," Obama said.

Such mindless sloganeering is troubling coming from those who want to be the next U.S. president.

But the theme is striking a chord with many, including owners of dogs and cats killed or hurt by pet food laced with the poisonous chemical melamine and parents worried about toys coated in lead paint from China.

As CanWest News reported last week, Canadian food imports have grown nearly 22 per cent in the last decade. The U.S. accounted for $11.9 billion of the $19.2 billion imported by Canada from 195 countries last year, but substantial volume came from China ($756 million), Brazil ($607 million), Mexico ($599 million), the Philippines ($91 million), Malaysia ($66 million), Iran ($26.8 million) and Ghana ($24 million).

As little as 10 per cent of imported produce is examined by the Canadian Food Inspection Agency despite the fact that some source countries tend to have poor hygiene, low food safety standards and lax regulation. Meanwhile, Canadian farmers must abide by strict food safety rules and face frequent inspections.

The CFIA says it doesn't have the resources to inspect everything, that it would take an army to scrutinize a million entries of fresh produce a day. Yet an Ontario farmer reports that he has already had five visits from inspectors this year, raising questions about the deployment of federal inspection resources.

It is clear that the rapid growth in imports has not been matched by a corresponding restructuring of administrative services to facilitate it. Canadians and Americans have to be persuaded that the products for sale on grocery shelves, at toy shops and in the shopping mall are safe. Unless inspection systems are put in place that can offer that assurance, the advances in alleviating poverty in the developing world through trade will be put in jeopardy.

Politicians should not be misled by anti-trade propaganda. The evidence is irrefutable that trade creates wealth for nations and lifts people out of poverty. A study by Columbia University economics professor Xavier Sala-i-Martin estimated that there were between 250 million and 500 million fewer poor people in 2000 than there were in 1970. In a 2005 report, the Food and Agriculture Organization of the United Nations argued that a growing agricultural sector is crucial for sustainable poverty reduction.

An anti-trade backlash would be a calamity for the global economy and cause the greatest hardship to the most vulnerable citizens in the least prosperous countries.

It's up to industrialized nations to ensure the growth in imports that can enrich the populations of the developing world is not impeded by bureaucratic failure.


The issue in this article is that the US and now much of the world is reconsidering Free Trade Zones and starting to consider more protectionist measures due to the safety and contamination of goods that are being imported from other countries, mainly China. If the US and other more developed countries were to remove the free trade zones and start imposing tariffs in order to control the quality of goods then less developed countries that rely on trade with larger countries for much of their GDP will be severly affected because the new barriers to trade will create a serious damper on the amount of money that they earn and the poorer people in those LDEC's will be hurt the most because it is they who are the ones who rely the most on the trade of natural resources with other countries as their main source of income.

Wednesday 15 August 2007

Summer commentary #2

http://www.dailytimes.com.pk/default.asp?page=2007%5C08%5C15%5Cstory_15-8-2007_pg5_1

In this article, the history of animosity between Pakistan and India has caused the slowing of trade between the countries through an inefficient method of transportation. The current system doesn’t allow trucks carrying goods for trade into either country and forces them to unload their goods and have a different truck on the importing country’s side come pick them up and take them to their destination. This is obviously a waste of time and money for both the importing and exporting country and also usually causes damage to the goods being shipped. Most goods are shipped by land and because of this forced transfer of goods between India and Pakistan, trade between surrounding countries (Afghanistan, Nepal, Bhutan, Tajikistan) that are being driven through either of these countries also suffer, especially ones that are land locked and have no other option for mass transportation. Both Pakistan and India have much to gain by streamlining their border crossing process because due to this inefficient system both countries are suffering massive losses to their GDP. In the article it’s mentioned that trade between the countries has been valued at 400 million for the past six years, however it has been estimated that it could instead be between 3 billion and 10 billion. Obviously this is an enormous increase and would be a big boost to both countries’ economies. Also because India and Pakistan are the among the most economically strong countries in the South-East Asia region, low trade between these two countries is a big limitation on growth in this region and if trade increased, both countries, especially India, would significantly strengthen economically.

What both countries should do is to allow free entry of cargo trucks from both countries, therefore eliminating the costly and potentially goods damaging transfer process. Also because both countries are part of the South Asia Free Trade Area, trade between both countries would increase and as a result so would the GDP’s of both countries and the surrounding countries, as they too would have easier access to the markets in India and Pakistan. International trade would increase as well because the land locked countries around India and Pakistan, such as Afghanistan, Nepal and Bhutan would have access to the ports in both countries and allow for greater ease in shipping their goods around the world.

Tuesday 14 August 2007

Summer destroying Commentary of death number 1

http://www.forbes.com/markets/feeds/afx/2007/08/08/afx3999541.html

The problem in this article is that the lumber companies in Canada are being taxed and therefore being forced to be less competitive relative to the US companies. In a truly free market, the US companies would have long ago been out competed by the cheaper Canadian lumber. This is obviously indicated in the article by it saying that the US suffers twice as many layoffs which shows that the US lumber companies are having to cut costs in order to remain competitive. However, the American government understandably wishes to protect its lumber market which is where the trade tariffs come in, but the tariffs would violate the NAFTA, so the US government created the SLA where Canada would control the tariffs but would control them under guidelines that were agreed upon by both the US and Canada. In this article the US claims that Canada is allowing too much lumber to be exported to the US for too low of a price and is therefore out competing the US lumber harvesters. This claim would violate the Softwood Lumber Agreement which says that the Canadian provinces that export lumber to the US must increase tariffs on lumber exports when lumber prices are low so that the US lumber firms can stay competitive with the Canadian firms. The US also claims that the taxes that Canada enforces are too small and that Canada is also circumventing the SLA by subsidizing the Canadian lumber firms when taxes are increased due to low prices therefore canceling out the effect of the tax.

In order for this problem to be resolved, the US lumber companies need to become more competitive which means that more lumber needs to be available because if there are more trees available to be harvested, then the cost of lumber will decrease. Therefore, instead of being whiney and accusing the Canadian government of not following a trade agreement that is detrimental to their economy anyways, the US government should instead focus more on replenishing their forests because not only would this aid the US lumber companies, but also would provide positive externalities to the public. By allowing Canada to specialize on lumber production and specializing upon a different industry as well would also be in not only the US’ best interests but would also increase the allocative efficiency of the US because Canada is obviously better at producing lumber. Therefore the US could concentrate on a different export and increase its GDP.