The Security and Prosperity Partnership: it even sounds nasty

I can’t believe I was fired from my advertising job.

Canada’s water is on the trade negotiating table despite widespread public opposition and assurances by Canadian political leaders, said Adèle Hurley, director of the University of Toronto’s Programme on Water Issues at the Munk Centre for International Studies.

A new report released Sep. 11 by the programme reveals that water transfers from Canada to the United States are emerging as an issue under the auspices of the Security and Prosperity Partnership (SPP). The SPP – sometimes called “NAFTA-plus” – is a forum set up in 2005 in Cancún, by the three partners, Canada, United States and Mexico.

Heh. Widespread public opposition. They should call Australia – we know how far that gets you.

The SPP is comprised of business leaders and government officials who work behind the scenes and are already responsible for changes to border security, easing of pesticide rules, harmonisation of pipeline regulations and plans to prepare for a potential avian flu outbreak, Nikiforuk writes.

“The SPP is run by corporate leaders; governments are irrelevant,” said Ralph Pentland, a water expert and acting chairman of the Canadian Water Issues Council.

Pentland envisions a future where, in response to ongoing drought problems in the United States, the SPP will make arrangements to dole out millions of dollars of public funds for private companies to build pipelines to transfer water from Canada.

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Massive water diversions from Canada do not make economic or environmental sense, according to water experts. Far better and cheaper is to improve water efficiency and eliminate waste. The United States and Canada lead the world in water consumption and are extraordinarily wasteful, Pentland says.

Moreover, most of Canada’s water is in the far north, not near its border with the United States. And even the transboundary Great Lakes are at their lowest levels in 100 years due to climate change, notes Nikiforuk.

Also interesting, while we’re busy concerning ourselves with the price of oil and the relative cost-effectiveness of sapping it from moronic sources:

Most of Canada’s oil comes from the tar sands, a 125-billion-dollar capital project in the boreal forest of northern Alberta province. One million barrels of oil flow south each day to the U.S. making Canada its largest supplier.

However, it takes three barrels of freshwater to produce one barrel of oil from the tar sands, says Nikiforuk.

…

Under NAFTA rules, Canada cannot reduce its energy exports to the United States, according to Gordon Laxer, director of the Parkland Institute, a research network at the University of Alberta. “The U.S. is the most energy wasteful nation on Earth. And Canada is sacrificing its environment to feed America’s addiction to oil,” Laxer said in an interview.

I hate NAFTA. I really do. Sadly, what will be worse is all the protectionist electioneering we can probably expect (on both sides), in the coming year.

What if I ride? What if you walk? Excellent article in Fortune on Bernanke. Being a wanker

I read this wonderful spleen-venting on my phone on the ride back out (marking mid-terms, giving mid-terms, moving apartments in New York – good thing I finished the revisions for my thesis last week).

The players in the biggest trouble, of course, were the ones who’d taken the biggest fliers in junk mortgages, ultra-risky leveraged buyouts, and other financial esoterica that proved to be malignant.

The stock market, which had been begging for a bailout and hasn’t ever seen an interest rate cut that it didn’t like, responded to the Fed’s half-pointer by running prices up. Ben Bernanke, the Street decided, is just what the doctor ordered.

Yes, it is about rate cuts, moral hazard, and coming to the aid of all the wrong people. I don’t want to say the mainstream people are late to this game, of course – I mean they’re only just starting to work out that maybe inflation isn’t being measured properly, maybe housing is in trouble and maybe we ought to pay some goddamn attention (I have a bad attitude about the mainstream of business/economics reporting, it is true. But only because they’re shit).

…as a result of the cut, those of us who keep score in dollars and didn’t need to be bailed out are less wealthy than we were in terms of anything other than our home currency.

Why? Because the rate cut contributed heavily to the dollar’s recent sharp drop in the currency markets – parity with the Canadian dollar, for God’s sake! – and to the price spike in hard assets like gold, silver, copper, and oil. So our wealth, relative to these other things, has diminished.

And wait, there’s more. Even though the Fed has cut short-term rates, long-term rates, which it doesn’t control, have risen in reaction to the cut. So whatever economic benefits may flow from lower shortterm rates will be partly offset by the rise in long rates, which are at least as important to the economy as short rates.

Finally, consider this. Even though Bernanke’s cut may mean that some junk mortgages will reset at lower rates, the cost of large, high-quality fixed-rate mortgages, which are tied to long rates, will be higher than they’d otherwise be. (Yeah, penalize the people who are prudent – way to go!)

The article does make some good suggestions – nothing regular blog readers (of blogs better than this one, of course) will recognise most of it as (a) old news, and (b) common sense. It is just galling (and has always been, at least to me) that authority somehow remains clinging to the fat, lazy sides of these outlets, who sit idly by and lead most of the cheers in the so-called ‘good times’ anyway. Is it that much to ask that news media have a memory?

I’m sure we all can’t wait for the rash of panic stories that will surely follow all the macroeconomic data covering the last month – without any regard to all their optimism a couple of months earlier when data that didn’t cover the last month came out. Someone ought to find out whether micro-economists get fewer ulcers than macro-economists.

HowTo: Consumer Behaviour. Or, the economics of my wife’s coffee-drinking

Eco 1 students: we’re about to study this sort of thing. Sort of.

So, the other day, my wife calls and asks me to work out her coffee costs. Two cafes at Columbia University, one in (after a fashion) her Art History library (call that one cafe A), and another … elsewhere (okay, I wasn’t really listening to that part – call it cafe B), but near.

Cafe A charges price P_A = $3 per cup – but every tenth cup is free. Cafe B charges P_B = $2.55 per cup. My wife wanted to know which was cheaper, and a third option, which was going to Cafe A and B in about an 80:20 ratio.

First, I assume that, since my wife is a student there, she’ll always benefit from the tenth cup. Her average price then is actually P_A = (3 x 9)/10 = $2.70 per cup. It will always be more expensive than going to cafe B all the time. If I put it graphically, suppose her options are anything from 100% A, to 100% B, and anything split between the two.

And thank God I always tell my students that they don’t need to draw their neo-classical markets to scale.

As she hangs up (this happened a lot – students were rolling by, pre-mid-term), my wife mentions that a nice man in cafe A makes her prefer their coffee, though.

Ah. This presents a problem – the quality of the coffee is not the same. My wife’s enjoyment, or Utility, from drinking coffee at/from cafe A (call it U_A) is clearly higher than that of/at/from cafe B (call that U_B). Now, what to do?

I’m going to assume, ceterus paribus, that this man’s niceness is the deciding factor (and kill him. But first, this). Now, my wife is indifferent between A and B.

Do the prices P_A and P_B need to be equal, for this indifference? No.

Does the quality, measured by U_A or U_B, need to be equal? Also no.

What is needed is that the ratio of prices equals the ratio of the utilities: i.e. that price-per-enjoyment-unit is the same. This tells us the value of coffee from cafe A in terms of the coffee from cafe B:

If we normalise U_B = 1, then P_B/U_B = 2.55. Then, if P_A/U_A = 2.55, as required for my wife’s indifference, and P_A = $2.70, U_A = 2.70/2.55 = 1.059. My wife is deriving 5.9% greater pleasure from cafe A, for which she is prepared to pay 5.9% more – hence a price 5.9% greater!

Now, this is on average. Cafe A is down a bunch of stairs, up which (either with coffee in hand, or having enjoyed it) to walk is a dis-incentive, particularly with a bag full of art history books. So that’s a negative Average Willingness-to-Pay Effect on price at cafe A. On the other hand it is, more-or-less, ‘in’ the art history library, which may make it more pleasant (nicer building, known students, what-have-you), so that’s a positive Average Willingness-to-Pay Effect on price at cafe A.

I’m lumping all of that into my wife’s Utility function, and calling it quality. It won’t all be the friendly man behind the counter, but the quality of the experience of getting/having coffee from or at cafe A is greater than from or at cafe B.

Students! What else is there? I have taken a fashion of behavioural approach to my wife’s indifference between two different cups of coffee at two different prices – but she is a price-taker. What might exist at the level of market demand for coffee from cafe A and/or B? Might one supply curve be higher? Might one demand curve be less elastic? Remember, we only know the market price, not the market quantity.

This is the stuff we’ve learned so far: how markets clear, and at what prices. What we’re coming to is why, or under what conditions, consumers decide to participate or not in that market, at that price.

China’s SimEconomy: a USD200bn foray into Sovereign Wealth Funds

This is not the first time. According to Wikipedia’s quite capable explanation of the phenomenon, China has about USD300bn of the estimated USD2.5tr total wealth belonging to Sovereign Wealth Funds, sloshing around the world. A USD200bn is nothing at which to sneeze, though.

The Chinese government launched a company Saturday to invest $200 billion from its vast foreign reserves, creating one of the world’s richest investment funds at a time of rising scrutiny of such state-run entities.

Financial analysts are watching to see where the new company invests and the impact on financial markets, especially demand for U.S. Treasury securities, in which Beijing holds a big share of its reserves.

Beijing announced plans for the fund in March in hopes of earning higher returns on its $1.3 trillion in foreign reserves, which are the world’s largest.

The announcement also mentioned the fund “starting out” with USD200bn – suggesting that, should said fund make money (or otherwise assist the economy of China), it could easily see it capitalisation expand in big increments. The world is already reacting quite predictably:

An official involved in creating the fund told The Associated Press in May it was likely to try to avoid causing political strains by buying minority stakes in companies abroad rather than pursuing outright takeovers.

Chinese companies have been uneasy about foreign acquisitions since an uproar in 2005 over state-owned oil company CNOOC Ltd.’s attempt to acquire U.S. oil and gas producer Unocal Corp. CNOOC dropped its bid after American critics said it might endanger energy security.

Some officials and economists want the new fund to finance foreign expansion by Chinese companies or buy oil and other resources needed by the country’s booming economy.

The rapid growth of such sovereign wealth funds run by Asian and Middle Eastern governments has raised questions about their intentions and impact on financial markets.

The European Union might restrict investments by government funds unless they disclose more about what they invest in and why, the top EU economic official said this week.

“If they don’t agree to these criteria, we can find good reasons to react in some cases,” EU Economy Commissioner Joaquin Almunia told London’s Financial Times in an interview.

China’s investments have drawn special attention because of the country’s large and growing economic and military might.

Again, and I’m pretty sure I’ve mentioned this previously: I don’t much agree or disagree with economies that benefited from gunboat diplomacy or their various East India Trading Companies turning about and lowering booms on anyone else trying to join their club – same goes for nuclear power – but it is hypocritical. Very, very hypocritical. Particularly when said countries (and this goes, also, for the nuclear question. Particularly given who has actually dropped Atomic bombs on whom) blithely overlook their own histories and the sources of their wealth.

But, then, why not? Who among the Bush supporters can even identify, still less justify, just where his family’s money and passport to aristocracy came from? Hint: grandfather made money with Hitler, great-grandfather (yes, America, there is an aristocracy – and you aren’t invited) profited as an industrialist and chief of the Ordnance, Small Arms, and Ammunition Section of the War Industries Board in World War I. The one before that was a Reverend. They didn’t so much enter US 20th Century aristocracy as help found it.

The trouble with globalisation is not, necessarily, things like Sovereign Wealth Funds, which we attack as destabilising while agreeing, in principle, to idiot notions like merging the New York and London Stock Exchanges. The principle problem with globalisation is that we’re all trying to participate in it while some people/countries believe they ought to own it. Or, like the US, are terrified of a financial world in which they cannot hope to participate, owing around thrice, in debt, that which China alone has in ready cash.

Newsweek knows inflation

And has a very entertaining way of talking about it. Even down to the illustration!

There’s No Inflation (If You Ignore Facts)

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Catch that bit about “core inflation”? That’s Fedspeak for: inflation is under control, unless you look at the costs of things that are going up. The core rate excludes the prices of food and energy, which can be volatile from month to month. Factor them in, and inflation is about as moderate as Newt Gingrich. In the first eight months of 2007, the consumer price index—the main gauge of inflation—rose at a 3.7 percent annual rate. That’s more than 50 percent higher than the mild 2.3 percent core rate. The prices of energy and food are soaring, at 12.7 percent and 5.6 percent annual rates, respectively, and have been doing so for years. As a result, the CPI—including food and energy—has risen 12.6 percent since July 2003, for a compound rate of about 3 percent.

Signs of inflation are evident throughout the economy. When investors fear a rising inflationary tide, they latch onto the driftwood of gold. The day Bernanke cut rates, the price of the precious metal soared to heights not seen since 1980, when inflation ran at nearly 12 percent! I read about this in The Wall Street Journal (whose newsstand price rose 50 percent in July), which I picked up in the lobby of a New York hotel (where the average nightly rate soared 12.5 percent in the first seven months of 2007 from 2006, according to PKF Consulting) while sipping on a Starbucks Frappuccino (whose price has risen twice since last October).

…

In the United States, companies are passing along high-er commodity and fuel costs by boosting prices, slashing portions and tacking fuel surcharges onto things ranging from deliveries to lawn service. And because food and energy prices are so visible—the prices are posted in public, and consumers buy these goods frequently—price increases have a disproportionate impact on perceptions of inflation. Each month the Conference Board asks consumers what they expect the rate of inflation will be for the next 12 months. The figure has been above 5 percent since April.

Told you. The article also contains an interesting tie to China, and a wonderful pat on the nose with a fist for Alan Greenspan (I just withheld about a thousand hyphened-in insults, all deserved):

There are sound macro-economic reasons to believe higher inflation may be a fact of economic life, according to former Federal Reserve chairman Alan Greenspan, who discusses the topic in his new memoir, “The Age of Turbulence.” (Apparently, the editors killed the original title: “The Dotcom Bubble Wasn’t My Fault. Nor Was the Housing Bubble.”) Greenspan notes that vast anti-inflationary forces in the 1990s—especially China’s emergence as a low-cost producer of goods—helped tamp down prices. But China’s rampant growth and rising living standards could encourage inflation. “China’s wage-rate growth should mount, as should its rate of inflation,” he writes.

Indeed. China’s CPI leapt forward 6.5 percent between August 2006 and August 2007, the highest rate in 11 years. One of the main culprits? An 18.2 percent year-over-year increase in the price of food. In still-poor China, food expenditures account for 37 percent of the CPI, compared with 14 percent in the United States.

…

China is bound to export its inflation—it exports everything else, after all—either in the form of higher prices for toys, or in the form of higher global prices for the commodities it consumes in increasingly huge gulps. The Wall Street Journal noted that iron-ore producers are about to ask for a 50 percent price increase for 2008, thanks to rising demand from Chinese steelmakers. Chinese car sales are up 25 percent through August, which helps support oil prices.

The punchline? That we delight in China’s ham-fisted macro-economic management (seriously, export tariffs?), but the Fed’s response to inflation – abject denial – is more like China’s response to SARS (“Problem, what problem? We just lock all our hospitals from the outside ’til they die or improve. No problem”).

The article is well worth reading in its entirety.

I sure am looking forward to teaching macroeconomics later this semester…

This will never be an academic blog

I could settle for academic-ish. Do you like Radiohead? I periodically re-discover this wonderful video somebody made, of the song “Creep”.