Recent Posts

Wednesday, May 23, 2018

On The "Everyone Cannot Run Trades Deficits" Argument

Steve Keen has posted "Some Preliminary Questions for MMT," in which he questions the Modern Monetary Theory (MMT) mantra that "exports are a cost, imports are a benefit." He points out: what is to stop everybody from running trade deficits? I discuss why his arguments are not particularly concerning from a policy perspective.

Sunday, May 20, 2018

Principles Of Canadian Municipal Finance (And Why A Land Value Tax Is Inferior)

Chart: Canadian Local Government Revenue As A % Of Total Government
The funding of Canadian municipal governments is not normally thought of as interesting topic; even Canadian fixed income investors are not particularly excited about it. However, there are two side issues that are of general interest. The first question is: what happens to Canadian municipalities if the housing bubble pops? (As a spoiler, not very much.) The second question is the feasibility of a Land Value Tax (LVT) which is a concept that gets some people on the internet very excited. I will then outline why a LVT is inferior to the Canadian property tax system (which is not that different than the American system for that discussion).

Wednesday, May 16, 2018

Canadian Housing And Perpetual Motion

Chart: Canadian Dwelling Prices

Canadian policymakers have blundered into a perpetual motion machine, which is more commonly referred to as the housing market. By underwriting the credit risk of the mortgage market, the government has allowed the funding circuit to continue in an uninterrupted fashion. The lack of a crisis has frustrated economic bears, and there is no obvious catalyst for their vindication yet in sight. In addition to outlining the Canadian situation, this article discusses some of the theoretical issues, as well as the policy implications.

Sunday, May 13, 2018

Housing Bubbles And Their Financing

Figure: Circular flows in a home purchaseHousing finance is interesting, and offers an interesting take on some theoretical issues. Although the theoretical issues sound abstract, they are critical issues in economies facing a housing bubble. This article looks at one aspect of housing finance: the limit to financing is credit risk, not funding. Monetary flows in a credit-based economy are circular.

Note: I hope to follow this up with one or two article discussing the Canadian housing bubble. This article covers some basic points, and I will get to the more hair-raising topics later. I have broken the discussion up as the full discussion would be too lengthy.

Wednesday, May 9, 2018

Business Sector Is The Main Source Of Modelling Uncertainty

From the perspective of those who work or are interested in finance, it seems obvious that business decisions are a major driver of the business cycle, assuming that policymakers are not doing anything particularly stupid (as in the Euro area in the post-crisis period). The important exception is the housing market, which is dependent upon the willingness of households to borrow insane amounts of money. (However, even this exception is dependent upon the decisions of the financial sector to extend the insane loans.) Conversely, one of the advantages of a mainstream economics education is that common sense is buried, and the view is that the primary driver of the business cycle is households' decisions to optimise consumption choices over time. The result is that the difficulty of forecasting business sector decisions is swept under the carpet.

Monday, May 7, 2018

In The Feedspot Top 25 Bond Market Blog List

Bond Market Blogs BondEconomics was one of the top 25 bond market blogs on the Feedspot list -- link to the list. This recognition is obviously welcome; my website has been around for almost five years, and traffic has been steadily growing. In addition to thanking the Feedspot survey team, I need to thank my readers for putting me there -- particularly those who also bought my books!

This offers a good excuse as any to do a "state of the blog" report...

Sunday, May 6, 2018

Why The U.S. Labour Market Befuddles Forecasters

Chart: U.S. Unemployment Rate and NAIRU

The U.S. labour market has continued its steady torment of forecasters and bond bears. The headline unemployment rate (U-3) dropped to 3.9% in April, yet inflation worries are negligible. If one told bond market participants and economic forecasters five years ago that the unemployment rate would have a 3-handle -- while the 10-year Treasury would have a 2-handle (just!) -- they would have snorted in your face. However, that is exactly what happened. The difficulties that forecasters are having with the unemployment rate/inflation relationship is exactly what one would expect if inflation were not forecastable; unfortunately, society demands that inflation be forecast.