Thursday, April 30, 2020

Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015?

Although this is a post from 2017, I talked about exchange rates this week in micro.

But first, on Jeopardy on Monday, they had a category titled "STARTS WITH "Z"." One clue was

"Literally meaning "golden", it's the basic monetary unit of Poland"

The correct question is "What is złoty?"

Yet not one of the three contestants even rang in. No one knew. A little disappointing since I am 75% Polish.

How to pronounce it? One site says "zuh·laa·tee." Another says "zwa-ti." You pronounce the ti like ti in tin but you drop the n. It seems like the accent is on the second syllable. See ItsEwelina.

Now on to exchange rates.

On June 30, 2014 , the Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) was 75.7 (the index starts in 1973 at 100, so the dollar was lower in value compared to other major currencies in 2014 than it was in 1973).

See Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) from the St. Louis Federal Reserve Bank.

But by March 16, 2015, it was at 93.1, just about a 23% increase in value.

Why did the dollar rise? Here is what The Economist magazine said:

"The principal reasons for the greenback’s rapid strengthening are simple to grasp. With Europe and Japan stuck in the doldrums, and China and other emerging markets slowing, America’s economy looks relatively strong. The IMF expects it to grow by 3.6% this year. The Federal Reserve has already begun to tighten monetary policy, by stopping its programme of asset purchases, and is now preparing the ground to go further. This week the Fed altered the wording it uses to describe its plans (see article), giving itself room to raise interest rates later this year—the first rise since 2006. With American monetary policy tightening, and other central banks still loosening, investors can make higher returns from dollar-denominated assets. In capital floods, and up the dollar goes."
See Mismatch point: The rise of the dollar will punish borrowers in emerging markets.

Here is another view from Andrew Hecht. He is an international commodity trader, an options expert and analyst.
"There are many reasons that the dollar has appreciated over recent months. The U.S. economy is still the largest in the world. Despite demographics, the U.S. remains the strongest economic nation in the world. The U.S. remains a powerful nation even though less than five percent of the world's population live within U.S. borders. The dollar is the reserve currency of the world. Many other nations hold dollars as a key part of their reserves due to the political and economic stability in the United States. Dollar strength has been the result of moderate growth in the U.S. economy. While European growth remains lethargic, the nation that experienced the highest degree of growth in recent years, China, has seen its growth rate slow. The Chinese economic has shifted from heavy manufacturing to a consumer based economy. As the size of the Chinese economy swells, it becomes harder to grow on a percentage basis as it has in the past.

Think of it this way, it is easier to make a seven percent return on one million dollars than it is to make a commensurate return on one trillion dollars. The sheer size of the Chinese economy makes the percentage growth rate seen in years past almost impossible to sustain. Therefore, Chinese economic growth has slowed on a percentage basis.

Relative strength of the U.S. economy, when compared to those of Europe and China, is a positive factor for the dollar.

A bear market in commodity prices has also been supportive for the dollar. The U.S. is a major consumer of raw materials and lower prices amount to stimulus for the American economy. At the same time, the currencies of nations that depend on commodity revenues have suffered because of lower prices. Canada, Australia, Brazil, Russia, South Africa as well as other commodity producing nations have seen their currency values depreciate alongside raw material prices.

Another positive influence for the dollar is the relative rate of interest paid on the U.S. currency when compared to other currencies. For the first time in nine years, the U.S. central bank raised short-term interest rates in the United States in December 2015. The Federal Reserve also stated their intention that rates will continue to head higher in the months and years ahead. Short-term interest rates in the U.S. went to zero in the aftermath of the housing and global financial crisis in 2008. Growth in the U.S. economy no longer supports such accommodative monetary policy. As the dollar has offered the opportunity for capital growth, in terms of its appreciation versus other currencies since May 2014, higher interest rates add additional support in that they increase the yield on the currency for holders."

Thursday, April 23, 2020

How much will you pay me if I take your oil?

This in not something we see very often-a negative price.

See U.S. Oil Costs Less Than Zero After a Sharp Monday Selloff: Many traders are betting that the coronavirus pandemic will run its course and demand for oil will jump later this year by Ryan Dezember of The WSJ.
"U.S. oil futures plunged below zero for the first time Monday, a chaotic demonstration of the dwindling capacity to store all the crude that the world’s stalled economy would otherwise be using.

The price of a barrel of West Texas Intermediate crude to be delivered in May, which closed at $18.27 a barrel on Friday, ended Monday at negative $37.63. That effectively means that sellers must pay buyers to take barrels off their hands.

The historic low price reflects uncertainty about what buyers would even do with a barrel of crude in the near term. Refineries, storage facilities, pipelines and even ocean tankers have filled up rapidly since billions of people around the world began sheltering in place to slow the spread of the deadly coronavirus.

Prices remain in positive territory for barrels to be delivered in June. In the most actively traded U.S. futures contract, crude for June delivery lost 18% on Monday to close at $20.43, while oil due to be delivered to the main U.S. trading hub in Oklahoma in November ended at around $31.66.

Those higher prices, like the recent surge in stocks, reflect investors’ optimism that the global economy will bounce back later this year, and that sufficient demand for fuel will return to soak up some of the glut that was building even before borders closed, factories idled and billions of people stopped driving and flying. Yet prices around $30 a barrel, which is below break-even for many producers, still suggest economic worries ahead, some analysts say. “It’s absolute bedlam,” said Chris Midgley, director of analytics at S&P Global Platts. “I hate to hear who’s on the wrong side of this.”

Monday’s trading was exacerbated by the looming expiration of the May futures contract on Tuesday. The price of oil futures converge with the price of actual barrels of oil as the delivery date of the contracts approach.

Contract expiration also flushes out speculators who have no intention to take delivery of barrels of crude. Exchange-traded funds, which control a large number of futures contracts, are among those that must sell at expiration. The forced selling adds downward pressure to prices."

Here is a Futures Market Example from Investopedia. The basic idea is that if you are selling a commodity like grain or oil, you want to avoid the risk that the price will be low when you finally get your product on the market. So an investor or speculator agrees to pay you a price that you are satisfied when your commodity comes to market. If the market price is lower than what your contract with the investor calls for, you still get the agreed upon price. If it is above the contract price, the investor gets the extra amount. You, as, say, a farmer, might not make as much as you could have but that is an insurance against a very low price. You can never be sure what the price will be in the future, so you are willing to agree to this keep from getting wiped out when things go bad.

Sunday, April 19, 2020

Is There Economic And Political Meaning In "The Wizard of Oz?"

To get a handle on this, you can read Money and Politics in the Land of Oz By Quentin P. Taylor.  Below is an excerpt from the Taylor paper:

"Dorothy, the protagonist of the story, represents an individualized ideal of the American people. She is each of us at our best-kind but self-respecting, guileless but levelheaded, wholesome but plucky. She is akin to Everyman, or, in modern parlance, “the girl next door.” Dorothy lives in Kansas, where virtually everything-the treeless prairie, the sun-beaten grass, the paint-stripped house, even Aunt Em and Uncle Henry-is a dull, drab, lifeless gray. This grim depiction reflects the forlorn condition of Kansas in the late 1880s and early 1890s, when a combination of scorching droughts, severe winters, and an invasion of grasshoppers reduced the prairie to an uninhabitable wasteland. The result for farmers and all who depended on agriculture for their livelihood was devastating. Many ascribed their misfortune to the natural elements, called it quits, and moved on. Others blamed the hard times on bankers, the railroads, and various middlemen who seemed to profit at the farmers’ expense. Angry victims of the Kansas calamity also took aim at the politicians, who often appeared indifferent to their plight. Around these economic and political grievances, the Populist movement coalesced.

In the late 1880s and early 1890s, Populism spread rapidly throughout the Midwest and into the South, but Kansas was always the site of its most popular and radical elements. In 1890, Populist candidates began winning seats in state legislatures and Congress, and two years later Populists in Kansas gained control of the lower house of the state assembly, elected a Populist governor, and sent a Populist to the U.S. Senate. The twister that carries Dorothy to Oz symbolizes the Populist cyclone that swept across Kansas in the early 1890s. Baum was not the first to use the metaphor. Mary E. Lease, a fire-breathing Populist orator, was often referred to as the “Kansas Cyclone,” and the free-silver movement was often likened to a political whirlwind that had taken the nation by storm. Although Dorothy does not stand for Lease, Baum did give her (in the stage version) the last name “Gale”-a further pun on the cyclone metaphor.

The name of Dorothy’s canine companion, Toto, is also a pun, a play on teetotaler. Prohibitionists were among the Populists’ most faithful allies, and the Populist hope William Jennings Bryan was himself a “dry.” As Dorothy embarks on the Yellow Brick Road, Toto trots “soberly” behind her, just as the Prohibitionists soberly followed the Populists.

When Dorothy’s twister-tossed house comes to rest in Oz, it lands squarely on the wicked Witch of the East, killing her instantly. The startled girl emerges from the abode to find herself in a strange land of remarkable beauty, whose inhabitants, the diminutive Munchkins, rejoice at the death of the Witch. The Witch represents eastern financial-industrial interests and their gold-standard political allies, the main targets of Populist venom. Midwestern farmers often blamed their woes on the nefarious practices of Wall Street bankers and the captains of industry, whom they believed were engaged in a conspiracy to “enslave” the “little people,” just as the Witch of the East had enslaved the Munchkins. Populists viewed establishment politicians, including presidents, as helpless pawns or willing accomplices. Had not President Cleveland bowed to eastern bankers by repealing the Silver Purchase Act in 1893, thus further restricting much-needed credit? Had not McKinley (prompted by the wealthy industrialist Mark Hanna) made the gold standard the centerpiece of his campaign against Bryan and free silver?"
Now an excerpt from an economics textbook by Irivin B. Tucker:
"Gold is always a fascinating story: The Wonderful Wizard of Oz was first published in 1900 and this children's tale has been interpreted as an allegory for political and economic events of the 1890s. For example, the Yellow Brick Road represents the gold standard, Oz in the title is an abbreviation for ounce, Dorothy is the naive public, Emerald City symbolizes Washington, D.C., the Tin Woodman represents the industrial worker, the Scarecrow is the farmer, and the Cyclone is a metaphor for a political revolution. In the end, Dorothy discovers magical powers in her silver shoes (changed to ruby in the 1939 film) to find her way home and not the fallacy of the Yellow Brick Road. Although the author of the story, L. Frank Baum, never stated it was his intention, it can be argued that the issue of the story concerns the election of 1896. Democratic presidential nominee William Jennings Bryan (the Cowardly Lion) supported fixing the value of the dollar to both gold and silver (bimetallism), but Republican William McKinley (the Wicked Witch) advocated using only the gold standard. Since McKinley won, the United States remained on the Yellow Brick Road."
But not everyone agrees with this. Economist Bradley Hansen wrote an article titled The Fable of the Allegory: The Wizard of Oz in Economics in the Journal of Economic Education in 2002. Here is his conclusion:
"Rockoff noted that the empirical evidence that Baum wrote The Wonderful Wizard of Oz as an allegory was slim, but he compared an allegorical interpretation to a model and suggested that “economists should not have any difficulty accepting, at least provisionally, an elegant but controversial model” (Rockoff 1990, 757). He was right—we did not have any difficulty accepting it. Despite Rockoff’s warning, we appear to have accepted the story wholeheartedly rather than provisionally, simply because of its elegance. It is as difficult to prove that The Wonderful Wizard of Oz was not a monetary allegory as it is to prove that it was. In the end, we will never know for certain what Baum was thinking when he wrote the book. I suggest that the vast majority of the evidence weighs heavily against the allegorical interpretation. It should be remembered that no record exists that Baum ever acknowledged any political meanings in the story and that no one even suggested such an interpretation until the 1960s. There certainly does not seem to be sufficient evidence to overwhelm Baum’s explicit statement in the introduction of The Wonderful Wizard of Oz that his sole purpose was to entertain children and not to impress upon them some moral. The Wonderful Wizard of Oz is a great story. Telling students that the Populist movement was like The Wonderful Wizard of Oz does seem to catch their attention. It may be a useful pedagogical tool to illuminate the debate on bimetallism, but we should stop telling our students that it was written for that purpose."
I found a review of the book in the NY Times from 1900 and it does not mention anything about OZ having political or economic meaning. The book was also made into a musical a few years later and none of the reviews of the musical mention any political or economic meaning.

Saturday, April 11, 2020

Flushing out the true cause of the global toilet paper shortage amid coronavirus pandemic

By Marc Fisher of The Washington Post.

It seems like panic buying and the fact that we are at home more (and are using more TP there and less at work) are the main reasons (and they may be related). It is costly for the makers of institutional TP to get their stuff to stores since it is not currently set up for the consumer market. It reminds me of  The Law of Increasing Opportunity Cost. That is the idea that as you try to produce more of one good (A), you have to keep giving up more and more of another good (B), to get 1 more unit of A. This is because different resources are better suited to different productive activities. More on this below.

"The problem, like the virus that spawned it, is global. In Australia, a cafe began accepting rolls of TP as payment — a cup of coffee will run you three rolls. In Hong Kong, armed crooks held up a supermarket; all they took was 600 rolls of the soft stuff. A pet store in Dornburg, Germany, last week set up an outdoor toilet paper drive-through in a parking lot when the owner was able to obtain a massive shipment.

Nothing seems to be unspooling in the right direction for a commodity that rarely gets much attention: In Hutchins, Tex., a tractor-trailer hauling a full load of toilet paper crashed and burned last week on Interstate 20. Rolls, most charred or reduced to cinders, splayed all over, shutting down the roadway.

Demand is as flush as supply is bare. Americans have spent $1.4 billion on toilet paper in the past four weeks, a 102 percent increase from the same period a year before, according to data collected by IRI, which tracks retail sales based on the bar codes on products. (Prices have been quite stable over that time.) Only hand sanitizers, disinfectant wipes and the like have seen substantially bigger sales boosts."

"So why do the TP shelves remain great banks of emptiness more than a month after many stores reported that customers were hoarding the stuff?

The leading theories are:

1. We’re buying too much toilet paper because we’re panicked there won’t be any when we need it.
2. We’re actually using way more than usual at home because most people are sheltering in place rather than using the facilities while at work, school, restaurants or other public places.

“The third theory is that both of those are right,” said Doug Baker, vice president at the Food Industry Association, which represents retailers, distributors and producers — the whole chain of businesses from the factory to you.

It’s a three-part problem, Baker said. Part One, hoarding: “We have actual situations across the country where people are buying an entire case,” he said. “Demand became unprecedented and still is.”

That’s something the industry knows well — customers regularly wipe out the toilet paper aisle ahead of big snowstorms and hurricanes, and the system can quickly rebound. But this crisis has tested limits because the spike in demand is nationwide, has been going on for some time, and is open-ended.

Part Two, displacement. The same number of people have the same need for toilet paper. But the industry is not set up for a wholesale move from work and school to home; home TP is softer, packaged in smaller rolls and is made and distributed by different companies than are the jumbo rolls seen in offices, institutional settings and public restrooms.

Part Three, adapting on the fly. Baker said the industry is changing, fast. Manufacturers have added hours at the factories and last week, the companies that make the industrial stuff made a deal with the country’s big food distributors to get their product into grocery stores.

But it’s not as simple as putting the big commercial rolls onto trucks. Most industrial rolls don’t have bar codes on the package, so stores have trouble stocking them. They’re adapting by putting little code stickers, like the ones stuck onto pieces of fruit, on the commercial rolls.

Grocers contend that, as Ira Kress, interim president of Giant Food, put it: “There is not a supply shortage, but it does take some time for the manufacturing process and our supply chain to catch up from the significant spike in demand.”

Giant’s suppliers “are shipping far more product to us than normal, but we are also selling far more product than normal,” Kress said. “Please only purchase what you need for this week as opposed to stocking up.”

It is unlikely the shortages will go away soon."

Here are some basic terms that economists use to discuss this issue:

Opportunity Cost-The value of the best foregone alternative. There is no such thing as a free lunch. If we want to build one more skyscraper, we may have to give up one submarine, since there may not be enough steel to go around (steel is scarce!).

The law of increasing opportunity cost-As more of a particular good is produced, the opportunity cost of its production rises. Why is the law of increasing opportunity cost true? Different resources are better suited to different productive activities. This is just about the same as saying people have different abilities, like some are more entrepreneurial and some are more bureaucratic.

Let’s assume that we have society with five workers who can make either of two goods, candles or shoes. Now the best candle maker will not necessarily be the best shoemaker and some candle makers will be better than others. This simply means that workers have different abilities.

In the real world, the best doctor would not be the best lawyer. Some plumbers are better than others.

In the table below, the number of candles OR shoes that each worker can make in a day is listed.


Again, the workers have different abilities, just as they do in the real world.

What are all of the combinations of candles and shoes that this society can make? If all the workers make candles, they can make 25 (just add up how much each worker can make). How many shoes? ZERO, since each worker spends all day in the candle factory (this is combination A in the table below).

If we want to make some shoes, the first worker we would tell to stop making candles, if we are rational and trying to get the best deal, would be worker V.  So we gain 7 shoes and lose 3 candles. That is why combination A is 22 and 7. Worker V no longer makes candles since they are making shoes. So the opportunity cost of making a shoe is some number of candles (and vice-versa).

The rest of the combinations that show what would happen if we kept moving workers out of candle making and into shoe making is in the table below.


Now what happens to the opportunity cost as we move from combination A to combination B? Then combination B to combination C, and so on? The table below shows this:

Candles Given Up
Shoes Gained
Candles per Shoe
A to B
B to C
C to D
D to E
E to F

By moving from point A to point B, we give up 3 candles to gain 7 shoes. The cost of each shoe in candles is .429 (3/7). Then we give up 4 candles to get 6 shoes, with each shoe costing .667 candles. The more shoes we try to produce, the more candles that have to be given up to get each shoe. So the opportunity cost of producing shoes rises.

This is called the law of increasing opportunity cost.

The law of increasing opportunity cost-As more of a particular good is produced, the opportunity cost of its production rises. (see how the numbers rise in the “Candles per Shoe” column in the table above)

Why is the law of increasing opportunity cost true? Different resources are better suited to different productive activities. This is just about the same as saying people have different abilities, which is what we see in the number of candles and shoes each worker can make.