January 19, 2018 — President Trump and the Republicans succeeded last month in passing their big tax cut. It may not have many of the desirable attributes of true tax reform (equity, efficiency, bi-partisanship, revenue-neutrality, or cyclical timing); but it is major legislation, as promised. What about that other major Trump promise, to cut the US trade deficit? The tax cut is virtually certain to raise the budget deficit and in turn to raise – not lower – the current account deficit. Call it the Return of the Infamous Twin Deficits. As when Ronald Reagan cut taxes in 1981-83 or when George W. Bush cut taxes in 2001 and 2003. Continue reading
September 30, 2017 — During most of this year, the VIX — the Volatility Index on The Chicago Board Options Exchange — has been at the lowest levels of the last ten years. It recently dipped below 9, even lower than March 2007, just before the sub-prime mortgage crisis. It looks as though, once again, investors do not sufficiently appreciate how risky the world is today.
Known colloquially as the “fear index,” the VIX measures financial markets’ sensitivity to uncertainty, in the form of the perceived probability of large changes in the stock market. It is inferred from the prices of option on the stock exchange (which pay off only when stock prices rise or fall a lot). The low VIX in 2017 signals that we are in another “risk on” environment, when investors move out of treasury bills and other safe haven assets and instead “reach for yield” by moving into riskier assets like stocks, corporate bonds, real estate, and carry-trade currencies.
Figure 1: The VIX is at its lowest since 2007
(April 27, 2017) The Trump Administration says it is sticking with its core campaign promise to renegotiate NAFTA, which remains unpopular with many Americans even though economists think it has been beneficial. The President said again on April 20 that he will invoke the procedures for renegotiating the trade agreement soon (within “the next two weeks”). After that comes a 90-day consultation period with Congress before actual talks begin. It is worth asking how it could be done right. Continue reading