Saturday, September 22, 2007

Loonie-$ Parity: Good News, Bad News; U.S. Now a Giant Wal-Mart, Everyday Low Prices for Canadians

WALL STREET JOURNAL---With the Canadian dollar surging against the U.S. greenback, Robert Katzman is dealing with situations they don't teach in Economics 101.

The owner of five strip clubs in Detroit and Windsor, Ontario, says American dancers are heading to Canada to earn the strengthened Canadian currency, and Canadian customers are heading to Detroit because their dollars go further there. He's fighting back by advertising more in the U.S. and offering free limo service to get Detroit men to visit his Windsor clubs.

The rise is a boon for Canadians looking to buy American real estate, stocks or just about anything for sale at the Mall of America in Bloomington, Minn., which has seen a 15% uptick in the number of Canadian customers this year. But it isn't good news for Canadian hotels or tourist destinations, or exporters of everything from beer and maple syrup to lumber and wheat.

The result has injected a touch of national giddiness into Canada's traditional reserve as a slew of opportunities present themselves, from real-estate deals south of the border to substantial breaks on college tuition for parents sending their kids to school in the States.

UPDATE FROM NY TIMES: On either side of the border, a buck is now a buck, or as Canadians call it on their side, a loonie. Coupled with high prices and high taxes for many things in Canada, the strength of the Canadian dollar is driving Canadians into the United States to shop for shoes, school supplies, gasoline, used cars and second homes.

MP: Compared to January of 2002, when the exchange rate was 1.6143 Canadian dollars per USD, everything in the U.S. is now on sale at a 38% discount for Canadians. The U.S. economy is now like a giant Wal-Mart for Canadians, with "everyday low prices."

Friday, September 21, 2007

Twin Cities Hit 'Critical Coolness," #1 For Business

1. LOS ANGELES (MarketWatch) -- Minneapolis-St. Paul is where it's at when it comes to business, much more so than any other of the nation's major urban areas. The Twin Cities ranked at the top of a MarketWatch study on the nation's best metro centers for business, winning by a wide margin. Minneapolis-St. Paul got 329 points, 38 points ahead of second-place Denver.

The Twin Cities region has a high concentration of massive and diverse Fortune 1000 and S&P 500 companies. It also has a significant number of Forbes 400 private companies. Further, Minneapolis-St. Paul has a healthy array of up-and-coming companies on the Russell 2000 index. And it has more small businesses per capita than just about any other city.

2. Wall Street Journal -- There are 19 Fortune 500 companies with headquarters in the Twin Cities, including Best Buy Co., 3M Co. and Supervalu Inc., which have been attracting young professionals looking to begin a career. Average salary last year was $44,980 in the Twin Cities, almost $5,000 more than the national average according to the U.S. Bureau of Labor Statistics.

"For the past two decades, these economic prospects made the Cities one of the fastest growing metropolitan areas in the Midwest," says University of Minnesota geography professor John Adams. Adding to the growing population is an influx of African and southeast-Asian immigrants.

Michigan 3 vs. Japanese 3

According to Edmunds, the average automotive manufacturer incentive in the U.S. was $2,362 per vehicle sold in August 2007, down $159, or 6.3%, from July 2007, and up $51, or 2.2%, from August 2006.

The average incentive for the "Michigan 3" (Ford, GM, Chrysler) was $3,373, and the average for the "Japanese 3" (Nissan, Honda, Toyota) was only $1,365. Add an additional $1,500 per vehicle in health care costs for the "Michigan 3" compared to about $200 per vehicle for the "Japanese 3," and it's no surprise that GM lost $2 billion in 2006 and Ford lost $12 billion.

GDP by State for 2006

According to a report released by the BEA for Gross Domestic Product by State in 2006:

1. The average economic growth for all states in 2006 was 3.4%.

2. Michigan was the only state with negative economic growth in 2006, -0.50%. It also has the highest unemployment rate in the country for August at 7.4%.

3. Idaho was the state with the highest rate of output growth, at 7.4%, followed by Utah (7.2%), Arizona (6.8%) and Oklahoma (6.7%), which are all right-to-work states.

Bottom Line: Michigan should maybe consider becoming a right-to-work state?

More On Inflation Targeting

New Zealand, Australia, U.K., Sweden and Norway have all adopted inflation targets, which have apparently contributed to either currency stabilization (UK, Sweden and Norway) or currency appreciation (Australia and New Zealand). The U.S. stands alone in the chart above, as the one country with a depreciating currency over the last 6 years, and also the one country among the group without an inflation target.

And the currency appreciation in New Zealand and Australia appartently haven't had any adverse effects, the unemployment rate in New Zealand is at a 20-year low, and the jobless rate in Australia is the lowest in 30 years, since the late 1970s.

Monetary Crack and The Fix: Inflation Targeting

The two graphs above tell a very interesting story:

1. In 2000, the Fed Funds target rate was 6.5% and the money supply (M1) was $1.1 trillion (see top chart above, click to enlarge).

2. In response to the recession of 2001 and the subsequent "jobless recovery" in 2002 and 2003, the Fed lowered its target Fed Funds rate to 1% by mid-2003 using expansionary monetary policy that increased the money supply by 27%, to $1.375 trillion by 2004 (see top chart above). In dollar terms, that was an injection into the economy of $275 billion, or almost $1000 of additional M1 ("monetary crack," see below) per person in the economy!

3. In the process of implementing expansionary monetary policy to lower the Fed Funds rate by 5.5% (from 6.5% to 1%) and expanding the money supply by 27%, the value of the U.S. Dollar (Trade Weighted Exchange Index: Major Currencies) has fallen by almost 31% since early 2002.

From Don Luskin, writing on the Fed's recent rate cut to 4.75%:

1. The crisis in credit markets is a direct result of the unwinding of speculative excesses that were set in motion in the first instance by the Fed's having kept interest rates so low for so long.

2. By lowering interest rates, the Fed effectively increases the quantity of money liquidity in the financial system, and risks increasing inflation as a result. The reactions to the Fed's rate cut this week of surging gold and oil prices, and a dollar falling to all-time lows on forex markets, confirms that there are serious inflationary consequences in our future.

3. Inflation is monetary crack - it promotes short-term euphoria, but in the end leads to ruin. Any short run growth effect will be more than offset by the dislocations and arbitrary transfers of wealth created by higher inflation, and ultimately by ruinously high interest rates that the Fed will eventually have to enforce in order to rein in the inflation it has created.

MP: Solution for monetary crack? The U.S. should go "cold turkey" and adopt an offical "Inflation Target" for monetary policy, like Canada, New Zealand, Australia, Switzerland, the U.K. and others (24 countries have inflation target). Notice that the currencies of countries listed above all have stable currencies that are at close to all-time highs, or at 10-20 year highs, against the falling dollar.

Thursday, September 20, 2007

The Educational Octopus in Venezuela

CARACAS, Venezuela (AP)President Hugo Chavez threatened on Monday to take over any private schools refusing to submit to the oversight of his socialist government, a move some Venezuelans fear will impose leftist ideology in the classroom.

All Venezuelan schools, both public and private, must submit to state inspectors enforcing the new educational system. Those that refuse will be closed and nationalized, Chavez said.

Education based on capitalist ideology has corrupted children's values, he said. "We want to create our own ideology collectively — creative, diverse."

A new curriculum will be phased in during this school year, and new textbooks are being developed to help educate "the new citizen," added Chavez's brother and education minister Adan Chavez in their televised ceremony on the first day of classes.

MP: Venezuela already ranks #135 out of #141 for Economic Freedom in 2007, according to the Cato Institute, are they trying to lower their ranking with educational "reforms"?

Related Quote: "Every politically controlled educational system will inculcate the doctrine of state supremacy sooner or later. . . . Once that doctrine has been accepted, it becomes an almost superhuman task to break the stranglehold of the political power over the life of the citizen. It has had his body, property and mind in its clutches from infancy. An octopus would sooner release its prey."

--Isabel Paterson, The God of the Machine (1943)

(Thanks to Larry Reed.)

WSJ.Com May Be Free

NEW YORK -- Media mogul Rupert Murdoch said today that he was leaning toward dropping the online subscription fee for the Wall Street Journal in a gamble to increase visitor traffic and website advertising revenue.

Historic Charts of the Day

TORONTO (AP) — The Canadian dollar reached parity with the U.S. dollar today for the first time since November 1976 (see chart below, click to enlarge).

DETROIT NEWS - Michigan's unemployment rate in August hit 7.4 percent, the highest level the state has experienced since Sept. 1993 (see chart below, click to enlarge).

D'oh, Canada!

Far from being a health care paradise, Canada's system is in disarray — and getting worse. That's why it's pursuing private-sector reforms, even as we consider national health care.
In 1998, 212,990 Canadians were on hospital waiting lists for surgery, waiting on average 13.3 weeks. Today, more than 800,000 Canadians are on waiting lists, waiting often 20 weeks or more (see charts above).

Survival rates for major types of cancer in the U.S. are higher than in Canada. As such, seven of 10 Canadian provinces send their prostate-cancer patients to the U.S. for treatment. What does that tell you?

Americans have more access to advanced medical procedures like dialysis and coronary bypass surgery, and use more medical technology like CT scanners and MRI imaging machines. Canada's Fraser Institute puts it bluntly: "Canadian patients do not get the same quality or quantity of care as American patients."

Read more here in today's Investor's Business Daily.

Wednesday, September 19, 2007

World Markets Surge on Fed Rate Cut, Expect More

1. World stock markets react positively today to Fed rate cut yesterday to 4.75%, see chart above of one-day returns in local currency, click to enlarge. Note that the World Index (except for US) rose by 2.75% today, similar to the 2.92% increase yesterday in the S&P500.

ADDENDUM: The world stock market capitalization is about $58 trillion according to
Global Financial Data, and there was a 3.2% dollar increase in world stock markets after the Fed rate cut according to MSCI Barra, meaning that the world stock market capitalization increased almost $2 trillion ($1.86 trillion), the day after the rate cut.

2. According to Fed Funds futures contracts on the CBOT:

a. There is an 80% chance of an additional .25% rate cut at the next FOMC meeting on October 30-31.

b. There is a 100% chance of a .25% rate cut by December (FOMC meets December 11), and a 68% chance of a rate cut of .50% by December.

NY Times Editorial on The High Costs of Ethanol

According to the NY Times, these are the Top 5 Reasons ethanol imposes high costs on the economy:

1. Rising Food Costs and Social Unrest: "The distortions (of ethanol) in agricultural production are startling. Corn prices are up about 50 percent from last year, while soybean prices are projected to rise up to 30 percent in the coming year, as farmers have replaced soy with corn in their fields. The increasing cost of animal feed is raising the prices of dairy and poultry products.

Ethanol production in the United States and other countries, combined with bad weather and rising demand for animal feed in China, has helped push global grain prices to their highest levels in at least a decade. Earlier this year, rising prices of corn imports from the United States triggered mass protests in Mexico. The chief of the United Nations Food and Agriculture Organization has warned that rising food prices around the world have threatened social unrest in developing countries."

2. Damage to the Environment: Ethanol threatens natural habitats and imposes other environmental costs. “The overall environmental impacts of ethanol and biodiesel can very easily exceed those of petrol and mineral diesel,” an OECD report said.

3. Ethanol Requires a Lot of Land: "Replacing 10% of America’s motor fuel with biofuels would require about a third of the total cropland devoted to cereals, oilseeds and sugar crops."

4. Corn Ethanol Requires Political Protectionism: "The economics of corn ethanol have never made much sense. Rather than importing cheap Brazilian ethanol made from sugar cane, the United States slaps a tariff of 54 cents a gallon on ethanol from Brazil. Then the government provides a tax break of 51 cents a gallon to American ethanol producers — on top of the generous subsidies that corn growers already receive under the farm program."

5. Ethanol is All About Politics, NOT Economics or Science: "What’s wrong is letting politics — the kind that leads to unnecessary subsidies, the invasion of natural landscapes best left alone and soaring food prices that hurt the poor — rather than sound science and sound economics drive America’s energy policy."

WOW! The NY Times nailed it.

Robert Lucas in Today's WSJ on Inflation Targeting

Nobel economist Robert Lucas writing in today's WSJ (subscription required) in support of inflation targeting:

In the past 50 years, there have been two macroeconomic policy changes in the United States that have really mattered. One of these was the supply-side reduction in marginal tax rates, initiated after Ronald Reagan was elected president in 1980 and continued and extended during the current administration. The other was the advent of "inflation targeting," which is the term I prefer for a monetary policy focused on inflation-control to the exclusion of other objectives. As a result of these changes, steady GDP growth, low unemployment rates and low inflation rates -- once thought to be an impossible combination -- have been a reality in the U.S. for more than 20 years.

I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.

To me, inflation targeting at its best is an application of Milton Friedman's maxim that "inflation is always and everywhere a monetary phenomenon," and its corollary that monetary policy should concentrate on the one thing it can do well -- control inflation. It can be hard to keep this in mind in financially chaotic times, but I think it is worth a try.

Canadian Health Care: No Waiting for Dogs and Cats

Not all Canadian health care is long lines and lack of innovation. We found one place where providers offer easy access to cutting-edge life-saving technology, such as CT scans. And patients rarely wait.

But they have to bark or meow to get access to this technology. Vet clinics say they can get a dog or a cat in the next day. People have to wait a month.

~John Stossel's latest column "Socialized Medicine Is Broken and Can't Be Fixed" (Note: The overall Canadian median waiting time for CT scans is 4.3 weeks in the traditional 12 specialties and and 4.5 weeks for psychiatry, see Fraser Institute.)

Meanwhile, waiting times for "free" health care in Canada for humans keep getting longer, according to The Fraser Institute (see chart below, click to enlarge). Note that the median wait time for a specialist in Canada increasd by 138%, from 3.7 weeks to 8.8 weeks, in just the 13-year period between 1993 and 2006.

Tuesday, September 18, 2007

Ethanol Recipe: Midwest Corn + D.C. Pork + Taxes

"Washington might have a love affair with ethanol for political reasons, but increasing ethanol production will only lead to higher taxes, higher prices for both food and fuel, and damage to the environment, making us all worse off in the process. Congress needs to say no to the ethanol hustlers and end its political addiction to corn."

From my editorial in today's Sacramento Bee, "Ethanol: Midwest Corn, D.C. Pork," also appeared in the Fresno Bee, the Saint Paul Pioneer Press, and the Charlotte News and Observer.

Monday, September 17, 2007

FTC: Market Forces Led to Rising Gas Prices

As directed by lawmakers, who accuse oil companies of manipulation and overcharging almost every time gas prices rise, the Federal Trade Commission once again investigated price increases for gas and oil, this time for the increases during the spring and summer of 2006 (see chart above, click to enlarge). The FTC's report was realeased a few weeks ago, and here is what it concluded:

The fact that the price increases were a worldwide phenomenon, coupled with evidence that U.S. refiners increased output once their refineries were repaired and back online, tends to support our conclusion that the 2006 price increases were caused by a confluence of factors reflecting the normal operation of the market, and also tends to explain why we did not find evidence that those price increases were caused by activities that violate the antitrust laws.

The FTC concluded that gas prices rose in 2006 for 6 factors relating to Supply and 1 factor relating to Demand:

Supply Factors:
1. Seasonal effects of the summer driving season.
2. Increases in the world price of crude oil.
3. Increases in the price of ethanol.
4. Declines in the production of gasoline, due to refiners' transition to ethanol.
5. Persistent refinery damage related to 2005 hurricane damage.
6. Refinery outages caused by unexpected events and required maintenance.

Demand Factor:
7. Increased Demand

In other words, the FTC concluded that market forces of decreased supply coupled with an increase in demand caused gas prices to increase in the spring/summer of 2006. As one
commentator said:

"Once again the bogeyman turns out to be nothing more sinister than the law of supply and demand. Sure enough, when supply dwindles and demand goes up, so do prices. Big surprise. But every time gas prices go up, a certain kind of politician is shocked, shocked! And demands an investigation. Which is a lot easier than taking Economics 101 all over again."

I think he's implying that politicians have already taken Economics 101, but I'm not so sure about that.
Also, notice that two factors for rising gas prices are directly related to ethanol, which Congress mandates and subsidizes!

Sunday, September 16, 2007

Shame on UC Davis and Reporter Sharon Stello

Greg Mankiw reports about how a group of UC Davis women faculty circulated a petition and pressured UC regents into rescinding an invitation to Larry Summers, the controversial former president of Harvard University, to speak at a recent board dinner in Sacramento.

Mankiw links to this article, which unfortunately grossly misquotes what Summers actually said. Here is what appears in the newspaper article:

In January 2005, Summers made controversial comments at the National Bureau of Economics Research Conference on Diversifying the Science and Engineering Workforce. There, he attributed the under-representation of women in science, math and engineering to, among other things, the “relatively clear evidence” that men and women differ in “overall IQ, mathematical ability (and) scientific ability.”

Here is a link to the transcript of what Summers actually said:

It does appear that on many, many different human attributes-height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability-there is relatively clear evidence that whatever the difference in means-which can be debated-there is a difference in the standard deviation, and variability of a male and a female population.

As the graph above illustrates, the average (mean) intelligence of males and females could be exactly equal, but the variability (standard deviation or variance) of male intelligence could be greater than the variability of female intelligence. Result: There are more males 3-4 standard deviations above the mean, and more males 3-4 standard deviations below the mean, which would mean that there are more male super-geniuses than females, and more male super-idiots than females. MIT math and science professors are typically 3-4 standard deviations above the mean, and males could be overrepresented in those groups because they are overrepresented in the top tail of the intelligence distribution (and the bottom tail).

Mankiw says that UC-Davis should be ashamed of itself, I say that the Davis Enterprise reporter Sharon Stello should be ashamed of herself for journalistic malpractice, for grossly misquoting and misrepresenting what Larry Summers actually said. Notice that she took two different parts of a long sentence, reversed them, left most of the sentence out, put those two parts together and made a completely new sentence, and in the process completely changed the meaning of what Summers actually said at the conference.


Cartoon of the Day

Greenspan's First Interview Tonight on 60 Minutes

(CBS) - Former Federal Reserve Chairman Alan Greenspan admits he "didn't really get it" that the subprime lending trend was significant enough to hurt the economy until very late 2005, but still defends his lowering of interest rates from 2001 until 2004 that critics say caused the crisis in the first place.

Greenspan, who led the U.S. Federal Reserve Bank through 18 years and 4 presidents, speaks to 60 Minutes correspondent Lesley Stahl in his first major interview tonight (Sunday), at 7 p.m. EST.