Jack Daniels Fishing Story

A little fun today. You know I have a proclivity towards Jack Daniels. So I thought I would share this JD Fishing Story sent to me by friend Jim C. 

The Jack Daniels Fishing Story

I finally got around to going fishing this morning but after a while I ran out of worms.

Then I saw a cottonmouth with a frog in his mouth, and frogs are good bass bait.

Knowing the snake couldn’t bite me with the frog in his mouth, I grabbed him right behind the head, took the frog and put it in my bait bucket.

Now the dilemma was how to release the snake without getting bit.

I grabbed my bottle of Jack Daniels and poured a little whiskey in its mouth.

His eyes rolled back, he went limp, I released him into the lake without incident, and carried on my fishing with the frog.

A little later, I felt a nudge on my foot.

There was that same snake with two frogs in his mouth.

Guest Blogger Buck Klemkosky Slow and Steady Job Growth Not Enough

The U.S. Labor Department announced job growth of 215,000 for March in line with expectations. Given a working-age population of over 200 million, it doesn’t seem to be a significant number of jobs. But 215,000 new jobs are the net increase of many moving parts.

Annually, the U.S. creates a little less than 13 million jobs, but also destroys about 10 million jobs. If there was a net increase of 215,000, it means that approximately 1.05 million jobs were created and 833,000 destroyed for the net increase of 215,000 in March. Even during the Great Recession, 10 million jobs were created annually but unfortunately 16 million jobs were destroyed. In the U.S., job creation peaked out at 16 million in 2000 and hit 14 million in 2006, so the economy has not recovered in terms of job creation. Fortunately job destruction of 10 million is a three-decade low.

Since the labor market hit bottom in February 2010, a net of 14.4 million jobs have been created over the 73 months, a record for the longest period of sustainable job growth. The unemployment rate rose to 5.0% in March from 4.9% in February. As perverse as it may sound, the rise in the unemployment rate was considered good news because the civilian labor force participation rate increased to 63% from a 39-year low of 62.4% in September, meaning more people are entering the work force. The labor participation rate of workers ages 25-54 was 81.2% in the first quarter, a three-year high, but still down from 83.3% in 2007. There still is some slack in the labor market.

The mood of many Americans doesn’t reflect the lowest unemployment rate in nearly a decade. While a net 14.4 million jobs have been created, only 5.6 million new jobs have been created since January 2008, which was the job peak before the Great Recession of 2008-2009. Job growth relative to population growth makes the 14.4 million look less impressive. The U.S. working-age population grew by 15.8 million since 2010 and 20 million since 2008. Job creation has not kept up with population growth. The Labor Department also reported that average hourly earnings increased 2.25% in March, relative to a year ago. This is below the last 6-month average of 2.5% but better than the 2.0% annual average over the prior four years.

Wages are subdued primarily because labor productivity remains close to zero. Productivity is weak because corporations have not invested in efficiency-enhancing equipment and may be substituting labor for capital because of low wages. Also the cause of the productivity problem may be structural; the service sector of the economy has become more dominant relative to the goods sector, and it is more difficult to increase productivity in the service sector. Also, less experienced millennials are replacing more experienced baby boomers in the work force.

Regardless of stimulative monetary and fiscal policies, the key to enhancing economic growth lies in the labor market. Economic output is a function of the number of workers times the productivity of each worker. The civilian labor participation rate needs to continue on its upward trajectory and labor productivity must improve. Increases in both are needed to get U.S. economic growth out of its lethargic 2.1% pace. Labor-force growth of 2% and productivity increases of 1% would produce a more desired 3% economic growth.

The Minimum Wage: Science versus Ideology

Wouldn’t it be cool if you could throw a bag full of stuff into the air and it would stay there, suspended in the air. It would be cool and it could probably help a lot of people. But science says “what goes up must come down.” We don’t argue with science and while man-made elevators and forklifts have been invented to lift things for us – one still can’t throw a sock full of rocks into the air and hope it will stay up there.

Even if we had a lobby group and a new political party decrying the mean and arbitrary nature of the Law of Gravity, that wouldn’t change matters. We are stuck with the science. You shake your head and wonder how many JDs I have thrown into the air tonight. But the truth is that we are witnessing these days the tragic retraction of science and reason in our lives. Perhaps because economic well being is tougher to achieve now we want to reject a lot of complicated talk about economic issues. We just want action. We want results. We don’t want "on the one hand this and on the other hand that". 

And so we have political candidates who will tell us anything – anything that makes us feel better. Trump will build a wall. Cruz will bomb the bad guys. Hillary will make women taller. Bernie will give us free education. We will raise the minimum wage and people will live better.

There is nothing wrong with wanting more equality and safety but these politicians focus their energy on ideology and goals without taking the time to explain exactly how and why their actual policies might bring about these results without throwing the baby out with the dirty bath water.. Using ideology and wishful statements, of course, worsens the country directly because it often pits us against each other. The last I heard this was a country with shared values and interests. We depend on each other.  It makes no sense to think that anything will be resolved by making us even more separate and resentful.

The solution to all this is as it always has been -- science. Think about it. Maybe you were not the brightest science student in school. But the evidence that we trust science is everywhere. Biotech drugs are finding new ways to cure cancer. We can hope for a cancer cure, but I like the odds of Lilly's biologists working on this problem. Or take Moore’s Law which explains why you can get more and more power out of smaller and smaller computer chips. Again, hope has little to do with all this power and convenience we obtain.

So if biology, chemistry, physics and the other sciences are so helpful, why are we so willing to reject or ignore the learning from economics? We often rely on economic laws. Many businesses know that the quantity they sell will depend on, among other things, the incomes of consumers and the prices of their goods.  Business firms also understand that a lack of resources makes it harder and more costly to produce goods and services. Economics is a soft science in the sense that the predictions might not always be right on the money, but predictions are based on generally accepted basics and logic.

A good example of all this is the recent legislation in California (and other places) raising the minimum wage to $15 an hour. Asked why this legislation is necessary, the promoters explained that it is unfair for people in California to make less than $15 per hour. The general answer is about fairness and not about science. Science be damned – it sounds very desirable to think that a government can raise a magic wand and make people’s lives better.

Economic science does not care who you are. In physics the focus is on atoms or subatomic particles. In economics we focus on people. But in neither case are we driven by fairness. What we care about is doing what is best for the community or the system. Consider some of these economic facts. First, the wage of a person is determined by the impersonal forces of supply and demand. We have seen it many times. When nurses are scarce, the wages of nurses rise. Is this fair to cab drivers? When people switch from coal to natural gas coal miners are needed less and their wages fall. None of this is about fairness. It is about using economic science to explain why wages and prices vary across people and places and over time. Prices and wages are signals -- precious signals that allocate goods and services from one place to another as needed. We don't need government czars telling every company what to produce. Markets perform these functions day after day. 

Second, raising the minimum wage begs the question – to what amount? If raising it to $15 per hour improves fairness, why not raise it to $20 per hour? The nice thing about the market is that wages move to resolve imbalances. But when your local Mayor is grubbing for votes, she talks about things like a living wage or some such thing. Apparently a person cannot live unless every member of his family is making the government determined living wage. And what does it take to live, anyway? I hope they include JD in that bundle of goods. 

Third, let’s keep in mind the fairness involved with everyone. Suppose there are people making $15 per hour today. When you raise some people to $15 then you have to raise those people to what? $20? And the people who were making $20 must be raised to $25? And so on. So now you have the government determining everyone's wage. Can we really do that? Unless of course you want everyone to make $15 per hour. Is that fair? 

Fourth, a part of economic science is the theory of the firm. If firms have to pay workers more, they have three choices – take lower profits, reduce the number of employees hired, or raise prices. If firms raise prices of their goods and services the minimum wage worker has not in fact been helped. If the prices of the goods you buy go up by a similar amount as your wages, then your wage still buys the same amount. Of course if owners or other workers are harmed, then you have clearly harmed someone in the name of fairness for someone else. What happens when those people react to those harms? Will that be good for the minimum wage workers? 

There is plenty more to say but that should suffice for today. The minimum wage is not about fairness. It is about helping or pleasing some voters at the expense of other voters. The minimum wage distorts science in the same way that using leaches cures modern diseases. The minimum wage is not proved to be fair or to improve the lives of workers. Governments cannot tell a worker what he or she is worth. A worker’s worth reflects education, training, experience, contacts, and an abundance of luck with respect to supply and demand. If you want to help poor people, it would be much less destructive to use other methods that more directly address education, training, contacts, and luck. 

Unfair Competition with Exchange Rates

On September 15, 2015 I wrote about exchange rates and said they were wild and crazy, like Steve Martin. I looked back over my previous posts and I have quite a few aimed at exchange rates and exchange rate policy. So for those of who are retired or simply bored I encourage you to spend a day or two memorizing all that stuff. My main reason for mentioning those past pieces is that they have a lot of background about exchange rates that I will avoid today as I focus on exchange rate data. 

My reason for writing about the data is that the word data sounds cool. Data this data that. Data is almost as cool as heteroscedasticity. But nevermind all that. Data is full of stories. Data without good statistical analysis means little but it can make you think. 

One thing we hear over and over these days is how China and many other countries take advantage of the USA when they depreciate their currencies. When other countries depreciate their currency that action appreciates the dollar and makes our exported goods less competitive. The story goes on that we have to shut down factories, fire workers, and make widows sew undergarments for Donald Trump.  Of course, the impacts of an appreciating currency are not that simple, but politicians like simplicity.

Today, instead, I share some data on this story about the appreciation of the US dollar. First, I will describe the data. I am using six key exchange rates for this analysis. The first five are well-known and are expressed as how many of the following currencies one can get with one dollar – European euro, Japanese yen, Canadian loonie, Mexican peso, and Chinese yuan. No offense to the Swiss or Brits, but I wanted to keep this manageable and I think the currencies I chose are the main ones for the dollar. A sixth exchange rate is a trade weighted index of the dollar evaluating it against a very broad group of currencies. Think of  TW as indicating how the dollar is doing against the currencies of nearly all our global trading partners.

So one decision I made was to choose these six exchange rates. A second decision related to examining changes over time. Did the dollar appreciate? The answer depends on the time period for the comparison. So here is what I decided. First, my data starts in 1999 – the starting year for the euro currency. Second, I eyeballed the data and decided that there were turning points in many of these currencies at or near the beginnings of 2005, 2008, and 2015. I agree, the results might have turned out somewhat different if I had chosen different dates. Third, I chose to use the data in January of those years. My table compares the April values of the exchange rates in 2016 to the January values in 1999, 2005, 2008, and 2015. All the data came from  https://research.stlouisfed.org/fred2/graph/

Check out the table below. The top half of the table has the actual exchange rates. Reading across the first line you can see the value of the dollar in January of 1999. In January of 1999 one dollar could purchase 86 euro cents. That dollar could also get 113 yens, 1.52 loonies, 10.13 pesos, or 8.28 yuans. The index number for what a dollar could buy in terms of a large number of currencies was 114.47. The second line shows you what the dollar could buy in January 2005. The fifth line shows you similar information for April 2016.

Let’s now use that information to see how the dollar has fared. Take the long haul first. Let’s look at the last column which contains information about the TW, the trade weighted value of the dollar. It was 114.47 in 1999 – 17 years ago. Some of you were mere children 17 years ago. In those 17  years the TW dollar value went to 119.5. In those 17 years the dollar appreciated by 4.4%.

This 4.4% increase in the value of the dollar against most of the world’s currencies supports the notion that the dollar appreciated. The question is what you make of that information. If we divide 6.6% by 17 years we could say that the dollar appreciated by an average of 0.3% per year. If we compare that 4.4% change over 17 years to changes in GDP or inflation or your waistline, you would conclude that 4.4% is not a huge issue. Or think about how much US firms might be impacted by the 4.4% increase in the dollar. Suppose those firms raised their prices by a total of 4.4% over the course of 17 years. Is that enough to convince you that those firms became less competitive? Were they forced to shut down because of this 4.4%? Is this a red herring so that politicians can protect us against evil beasts lurking in dark forests?

So you ask – Larry what in the Hades is this TW thing? Let’s instead talk about that evil monster China. Hmmm – how much did the dollar appreciate against the Chinese currency? The chart shows that a dollar could get you 8.28 yuan in 1999 and 6.5 yuan in 2016. That is NOT an appreciation of the dollar. The dollar fell against the yuan by 21% since 1999. Looking down the China column in the bottom half of the chart shows that the dollar has fallen against the yuan since 1999, since 2005, and since 2008. Only if you measure over the last 15 months can you see the dollar rising against the yuan – by less than 5%.

One more calculation -- how the dollar fared during the 11 year period between 2005 and 2016. The dollar appreciated at roughly a 5% to 9% clip against the Yen, the Loonie, and against our major trading partners. It is up 16% against the Euro, up 58% against the Peso, but down 21% against the Yuan. Much of that occurred after it became known that the financial crisis was spreading from the US to the rest of the world. As those countries are recovering and showing more stability today there is less need for the dollar to provide cover.  

Since I am running out of JD and your patience, I will end with this. The dollar is not greatly appreciating against anything in general. It is clearly rising in the last 15 months, except against the yen. But that increase is smaller than the increases that occurred right after the global recession spread. Further, if you look at the value of the dollar today you see some very different stories from country to country. 

The dollar has appreciated greatly against the Mexican peso while mostly depreciating against the Chinese yuan. If you want to find stories explaining subpar US growth and employment I suggest you look beyond exchange rates. There is no clear story here. More than likely the dollar strength reflects the weaknesses in other countries.  If and when the rest of the world stabilizes the dollar will return to a lower level. I doubt that political attacks on our trading partners will do much to normalize the dollar. 

Table. US Dollar Value Relative to Selected Currencies, 1999 to 2016

Date Euro  Yen Loonie Peso China TW 1999 0.86 113.29 1.52 10.13 8.28 114.47 2005 0.76 103.34 1.22 11.26 8.28 109.58 2008 0.68 107.82 1.01 10.91 7.24 98.65 2015 0.86 118.25 1.21 14.70 6.22 112.77 2016 0.88 108.07 1.30 17.76 6.50 119.50 Percent Change  to 2016 since 99 2.0 -4.6 -14.4 75.4 -21.5 4.4 since 2005 15.5 4.6 6.1 57.7 -21.5 9.1 since 2008 29.6 0.2 28.7 62.9 -10.2 21.1 siunce 2015 2.3 -8.6 7.2 20.9 4.5 6.0 Note: Exchange rates are foreign currency units per dollar in January of each year The quote for 2016 is April of 2016.

Cash: It's Just as Good as Money by Guest Blogger Buck Klemkosky

What Yogi Berra said is only partially true. In fact cash and money are not the same thing. There is a lot more money in the world and the U.S. than cash. Currency is another name for cash and in the U.S. it includes coins minted by the U.S. Treasury and bank notes ($1 to $100 bills) printed by the Federal Reserve Bank. The U.S. has $47.6b of coins in people’s pockets or piggy banks and $1,369.2b of FRB notes floating around. Not all are circulating in the U.S. as the dollar can be used in almost any country in the world. No one knows exactly how many dollars are outside the U.S. but government estimates are up to one-half. They have been talking about a cashless society for years but the amount of U.S. coins and notes increases 5-6% annually.

Currency (coins plus FRB notes) in circulation in the U.S. is $1,416.8b. Money includes all that currency but in addition includes bank demand (checking) deposits, shares at credit unions and money market funds and outstanding traveler’s checks. That equation describes M1, a narrow version of the money supply which totals $3,050.2b today. M1 plus savings deposits and time deposits less than $100,000 equals M2, which totals $12,466.7b. M2 is a broader measure of the money supply which the Fed monitors closely in setting monetary policy. 

Currency in circulation is less than half of M1 and 11.4% of M2. So cash may be as good as money but it’s not the same as money which is more widely used and more important in economic transactions.

Cash may be just as good as money for small economic transactions but obviously very burdensome for large transactions. Analysis of the denominations of currency outstanding tells an interesting story. In the U.S., $100 notes outstanding total $1,080.b, 78% of all notes. In Europe, there are $322b of €500 notes ($550) outstanding, 30% of total euro notes; Switzerland has $39b of SF1000 ($990) notes, 92% of all Swiss notes and Japan has $67b of ¥10,000 ($88.50) notes, 92% of all yen notes outstanding. Luxembourg, a country notorious as a tax haven, has euro notes outstanding equal to 200% of its economic output.

The obvious question is why there are so many large denomination bills outstanding in these countries? Most Americans don’t carry a lot of $100 bills and many Europeans don’t know the 500-euro note exists; most are in Russia and other countries outside the Eurozone. Swiss retailers usually will not accept the SF1000 bill for payment. 

Subtracting the amount of U.S. currency abroad still leaves over $2000 for each of the 330 million U.S. citizens and over $5000 per household. The obvious answer is that many of the high-denomination notes play little role in the functioning of the legitimate economy. It is the currency of choice for illegal purposes such as drug trafficking, money laundering, fraud, tax evasion, corruption and terrorist activities. It has been estimated by the IRS that $350b-$400b annually is not reported as income because of cash transactions in the underground economy. A 2011 study found as much as 18% of all taxable income goes unreported costing the government nearly $500b in revenue. There are legitimate reasons for having cash transactions but the probability of abuse increases.

Many are in favor of abolishing all high-denomination bank notes to make it more difficult to carry on illicit activities. Canada scrapped a C$1000 note in 2000 and Singapore a S$10,000 note in 2015. In 1969, the Fed and U.S. Treasury stopped issuance of $500, $1000, $5000 and $10,000 bills although they remain legal tender. At the end of 2015, $300m of these bills are still outstanding, most as collector’s items. While the U.S. Treasury says they have no plans to change the denominations in use today, the European Central Bank will consider abolishing the €500 note later this year. Achieving international consensus to eliminate other high-denomination bank notes will not be easy but it will be on the G20 agenda later this year for consideration.

Another reason some are making the case to eliminate cash as another “outdated relic” is monetary policy and the advent of negative interest rates. Banks in the Eurozone, Sweden, Denmark, Switzerland and Japan already have to pay to deposit funds at their respective central banks. If negative rates should ever filter down to bank depositors, it would incentivize everyone to convert deposits to currency. Large corporations and institutions with billions of dollars in deposits can’t easily convert them to physical cash; it would have to be stored in warehouses and vaults, incurring storage and security costs. Some large banks already impose a fee on large corporate deposits. Individuals could more easily convert deposits to cash and put it under the mattress, but at the risk of theft. Conversion of deposits to cash and hoarding of cash would diminish the effectiveness of monetary policy. The ability of a central bank to implement negative-interest-rate policies would be made less effective by cash hoarding. For example, the amount of SF1000 bills has increased by 17% since the Swiss Central Bank imposed negative interest rates on bank reserves in December 2014. Even though bank depositors don’t yet pay negative interest rates, this shows the sensitivity of big-bill cash hoarding to the possibility.

While there hasn’t been much progress toward a cashless society in the U.S., some countries such as Sweden and South Korea have seen the use of currency diminish. South Korea, for example, is a checkless society although bank notes are available. Every major building there has an ATM machine which allows one to pay bills via wire transfer to any other bank with no fee. The technology certainly exists to have a cashless society in the U.S. and elsewhere using mobile phones, online banking and more sophisticated ATM machines. Digital transactions would be cheaper, faster and provide more transparency. Those engaging in illicit activities would not like it or if worried about “big brother” overseeing their activities. There would have to be a central bank system to provide trust and stability unlike Bitcoin and several other private digital currencies. But don’t expect currencies to fall by the wayside any time soon; currencies have been around for 4,000 years and probably will be for many more decades. People like the security of having physical cash at their disposal as Yogi undoubtedly did.

The Fed Wishes You a Happy April Fool's Day

I don’t usually write short punchy things for my blog but I just couldn’t help myself yesterday after I read the paper and noticed that Mrs Yellen was being lauded for her recent remarks in which she assured the world that the Fed would hold off on its plan to become again a responsible Central Bank. Apparently people who operate in the stock market were given an unexpected Easter egg from Mrs Yellen and they reacted by pushing the stock market a bit higher.

So what’s my beef with all that? Or more appropriately, what’s my tofu?

Let’s imagine that you were perfecting your best run on the ski slope in Maggi Valley when you heard a loud crack and the next thing you knew was that ski patrol people were buckling you into a sled bound for the nearest hospital. Both you and the doctor stared at your swollen and oddly bent leg. Aha said the doctor – you seem to have injured your knee. Clearly this North Carolina doctor had trained at Harvard.

Dr Tarheel concluded that what you needed was a large shot of pain medicine. That pain medicine worked quickly and you felt much better. In fact you felt so good that you kissed four nurses and you patted Dr Tarheel in a place that was reserved for only Mrs Tarheel. You couldn’t walk very well but who cared! Off you went assisted by metal crutches. Later when the pain returned, you gobbled a few more pills and life was good.

Back home in Atlanta, you realized that you still could not walk. So you saw Dr Charlie and he explained that there was serious damage in your knee and he would have to operate. Your rehab would be both painful and long. Nurse Peter smiled and agreed wholeheartedly. Painful and Long? Life is too short for painful and long. You are a busy man. People need you on your feet. Maybe someone will invent a new way to solve knee issues that is not painful and long. And man, that pain medicine is good stuff. You might take three pills this time instead of two.

So as time goes by you get pretty good at those crutches. Of course, your ankle starts to hurt because of the extra stress of walking with crutches and you start getting bellyaches from all those drugs. Dr Charlie calls and asks how things are going and you explain that you still don’t have time for the operation. People need you and you just can’t let those other people down. And by the way, could you give him a prescription for new pain pills that will help with the swollen ankle and the hurting stomach?

Enough? Silly? Not really. Because no one gets it. Mrs Yellen doesn’t get it and the stock market doesn’t get it. This country has real structural problems that are not going to go away. The Fed has become the drug of choice – basically healing nothing and making us feel a little better, maybe giddy at times. In the meantime the drugs are creating imbalances in markets. Savers have gone half a decade with close to zero for a return. They need to go to the racetrack to get decent returns on their money. Banks riddled with new regulations sit on reserves while firms refuse to ask for loans. These imbalances are accumulating and will leave us on a cliff waiting for a stiff wind. 

If only China were stronger. If only Europe would grow faster? If only oil prices would rise another couple of bucks. If only the sun would rise in the West. The Fed is waiting and meanwhile we are getting swollen ankles and tummies. Shame on you Mrs Yellen! Do your job and return to responsible central banking. Maybe if those people who run the rest of the government knew you had some principles, they might start doing their jobs too. Now where is that JD?