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Today, stocks fell sharply out of fear of a trade war between the United States and China. On Thursday, President Trump announced that he has asked the United States Trade Representative to consider $100 billion in trade tariffs against China, in addition to the tariff he proposed earlier in the week on 106 US products. US and global markets plunged. The S&P 500 fell 2.2 percent and NASDAQ fell 2.3 percent. Today the major averages closed at the lowest they had all week due to the persistence of volatile trading throughout the day as a result of Treasury Secretary Steven Mnuchin revealing the possibility of a trade war with China.

Many have warned that a trade war could be hazardous to the health of the global economy. Benoit Coeure has warned that if the US and China were to adopt protectionist trade policies, the global economy could experience “severe shocks”. The economist has also said that changes in tariffs could result in a 2.5% baseline reduction in the United State’s economic forecast. The Trump administration would be wise to use history as a guide as it pushes for increased tariffs on China. The US pursued protectionist trade policies with the Smoot-Hawley Tariff Act of 1930, which unintentionally increased the economic strain on the nation and prolonged the Great Depression. While the circumstances in 1930 are not the same as today, the negative consequences that this trade war had on the United States should be a point of concern for the trump Administration, especially considering the impact that these discussions have already had on the performance of the stock market.



Lee Bernstein, Faith Pinho, and Benjamin Schaeffer

The Federal Reserve made headlines last week for its decision to raise the federal funds rate, indicating confidence in a strengthening economy. The Fed increased the interest rate to a range of 1.5 - 1.75 percent. Previously, the range was 1.25 to 1.5 percent. The unanimous decision by the Federal Open Markets Committee to raise the range by a quarter percentage point will affect several sectors in the short-run American economy. As Heather Long wrote in the Washington Post last week, “As the Fed boosts rates on financial institutions, banks turn around and lift interest rates on credit cards, auto loans, small business loans and home mortgages.” In this post, we will look specifically at how the Fed’s interest rate hike will impact credit cards, home mortgages and auto loans.

For many Americans, credit cards an important component of their financial portfolio. It enables many households to make larger purchases that they might not ordinarily be able to make. When the Federal Reserve raised its interest rates this week, many Americans do not realize they will be directly affected. The variable interest rates on most credit cards are tied to the prime interest rate which is determined by financial institutions and is directly correlated to the federal funds rate, which the Fed just changed. There will be increase almost equivalent to the change in the federal funds rates.

Another component to pay attention is the effect of the Fed changing interest rates on auto loans. USA Today, when discussing the market, said “they’re still benefiting from a highly competitive market for auto loans that’s keeping borrowing costs low”. This suggests that this specific change to interest rates may not have as large of an affect on car loans as it could. The same article pointed out that old car loans would not be affected by this change in interest rates. An AutoNews article discussed the car purchasers that will feel this changes are “the ‘marginal buyer’ with poor credit ‘is going to have to take that walk over to the used-car lot.’” So, not every American will be hard hit or feel the affect equally.

For homeowners with adjustable mortgage rates, they can expect a rise in their monthly mortgage bills. A singular rise in the federal funds rate would not significantly impact the mortgage rate, but this week’s rise -- in tandem with the two other expected hikes in 2018 -- would truly impact homeowners’ monthly payments. Economists at CNBC predicted that the average mortgage rate could rise from 4.58 percent to 5 percent by the end of the year. “Although your bills might not change too much after Wednesday's bump,” journalist Emmie Martin writes, “things can start to add up after a few more.” To avoid rising rates, Martin recommends switching to a fixed-rate mortgage. Current rates are favorable enough to justify making the switch.

Many industries will be affected by the Federal Reserve’s recent changes; however, as discussed in class, it will take up to two years to see the full effects of the interest rate increase. As the New York Times mentions, during this FOMC meeting, it was “signaled the central bank is set to raise it at least two more times this year”. But, the same article goes onto say how, these increases means that there is an “increased expectation for economic growth”. Like class discussion brought up, this increase sheds insight into Jerome Powell’s mindset given that this was his first FOMC meeting as president of the Federal Reserve.


Ed Calley and Griffin Scott

The North American Free Trade Agreement or NAFTA was implemented in 1994 in order to encourage economic activity between the United States, Canada, and Mexico. After being enacted, tariffs in all three countries were removed and measures were enacted to facilitate greater trade in the region. The overall effects of NAFTA are unclear due to the variety of issues that affect the economy. However, regional trade in North America increased dramatically after the enactment of the agreement. The major concern with NAFTA was job loss in the United States, specifically in the auto industry. Since the enactment of the agreement, many manufacturing jobs were lost to Mexico as it became easier for companies to establish assembly plants in Mexico where wages are considerably lower than in the U.S.

Another issue with NAFTA for the U.S. is the increasing trade deficit with Mexico. The total impact of NAFTA on the U.S. economy is estimated to be relatively low as the level of trade with Canada and Mexico is comparatively only a small portion of GDP. However, there are several other benefits of the trade agreement. Overall, U.S. trade in the automotive industry has increased drastically since the deal. The deal has allowed the automotive industry to become more globally competitive due to the development of supply chains and better economic integration in North America. Another important result of NAFTA is the idea of production sharing between the three countries. It is interesting to note that due to production sharing it is estimated that 40% of U.S. imports from Mexico and 25% of imports from Canada originated in the United States. Overall the agreement has allowed for a huge increase in trade for the automotive industry.

Trump has criticized NAFTA, which was put into effect in 1994, calling it the "worst trade deal ever made.” He has publicly blamed the agreement for the loss of manufacturing jobs and has claimed it significantly contributes towards our trade deficit. To put the implication of NAFTA into perspective, more than a third of U.S. exports stream to Canada and Mexico. Because of this, the NAFTA renegotiations have been closely followed by business and labor groups to see how Trump's team will prioritize objectives and ultimately respond in the renegotiations.

In the Summary of Objectives for the NAFTA Renegotiation released by the Office of the United States Trade Representative, the agency proposes a plan to reduce the U.S. trade deficit with Mexico, restrict the quantity of imported material, and eliminate a controversial mechanism to review trade disputes. The summary calls for the United States to reduce its trade deficit with NAFTA countries. Trump has been extremely vocal on bilateral deficits—when the US import more from a trading partner than export to the respective country—because he believes the deficits signal a broken trading agreement. Furthermore, the document details rule changes to govern the trade of services, such as telecommunications, and digital goods, such as music and electronic books. Trump also prioritizes creating a mechanism to prevent the countries involved in NAFTA from manipulating their currency to gain an unfair competitive advantage, like China had employed to subsidize its exporters.

In contrast to many of Trump’s beliefs, there is a general consensus among economists regarding NAFTA, believing that it has benefited the U.S. economy by increasing trade and lowering the cost of consumer goods while hurting small groups whose jobs were relocated across the border. In 2012, a survey of 41 prominent economists concluded that nearly 90% felt the U.S. were better off under NAFTA than prior trade agreements. It will be interesting to see how the renegotiations transpire, and how effective Trump’s self-proclaimed mastery of deal-making truly is.


By Mark Croughan and Trip Calihan

The relationship between technological progress and the ability to mass produce at a higher level is easily comprehended; the more automated a process is, the less manual labor is needed to fine-tune every product, and thus a machine based system will often be both cheaper over time and be able to produce without slowing down. However, a rather overlooked byproduct of the mechanization of the American economy is the effect it has not on mass-produced goods, but services that cannot be mechanized. American Economist William Baumol has addressed this as part of his theory of "Cost Disease" and is quoted as saying, "in a world of rapid technological progress, we should expect the cost of manufactured goods — cars, smartphones, T-shirts, bananas, and so forth — to fall, while the cost of labor-intensive services — schooling, health care, child care, haircuts, fitness coaching, legal services, and so forth — to rise." And although the theory was proposed years ago, Baumol's words hold true. Goods as a whole have declined, whereas services such as health care and education have risen (relative to the inflation rate.) We can observe these phenomena below:

In accordance with Baumol's accurate hypothesis, we can see how American government spending has become far more focused on service spending as a whole. While conservative mindsets potentially view this as a tragic misuse of government dollars, Baumol suggests that there was no avoiding this. He claims, "It was simply inevitable that these services would get more expensive over time...the rising cost of services is an unavoidable side effect of rising affluence generally." This holistic rise of affluence is again, another byproduct of American mechanization and technological advance. As we become further and further ingrained to a mechanical system, we learn to work better around it and force the system to produce as much as it possibly can for the economy. Bottom line, this growing capability to mechanize the production of goods has completely reshaped the proportion of dollars going towards goods versus services.




By: Matt Dodson and Molly Mann

Donald Trump’s “Make America Great Again” campaign enticed the middle class, inspired the politically frustrated, and arguably served as the deciding factor in his presidential victory. His campaign focused on many important issues, specifically, foreign policy. An aspect of Trump’s strict foreign policy could likely come to fruition as he has recently announced a 25 percent tariff on steel and 10 percent tariff on aluminum. (

Tariffs, taxes levied on imported goods typically intended to discourage imports and raise government revenue, can prove healthy for the economy in the short term by decreasing trade deficits, improving domestic competition, and lifting the economy overall. In our previous blog, we discussed net exports and noticed a slight increase in net exports during periods of economic recession. However, in the long term, tariffs could damage the economy by ignoring the principles of specialization. For instance, several years ago our population worked in steel mills providing materials for production, but now more Americans attend college and work higher paying jobs. The changing workforce now earns larger paychecks, but must sacrifice some of that income to pay off their past tuition and debt. Coinciding with the evolving job market and rising student debt, Trump could face challenges in attempting to resurge the steel industry if these jobs do not provide incomes to cover the costs of living and rising education costs.

Overall, the looming threat of Trump’s tariffs leads to volatility in the financial markets due to speculation of economic uncertainty. Although the market has fluctuated drastically based on Trump’s previous actions, it always recovers. However, this situation may mean different for the market. Trump’s original announcement caused equities to fall, such as the Dow closing 420 points lower earlier in the week. Granted, financial markets such as the Dow or the NASDAQ change drastically on a day to day basis and cannot serve as direct predictors of implementations of future policy. Nevertheless, the Dow closed 336.7 points higher on Monday with Caterpillar, a company which relies on steel and aluminum, contributing to the gains with a 3.2 percent rise.( These fluctuations and market responses speak towards the global uncertainty and disagreement towards Trump’s propositions, however, the Caterpillar trades Monday appear as an optimistic response to the previous week.

Trump is not the first one to try to enforce a steel tariff. George W. Bush also unsuccessfully attempted to implement major steel tariffs in March 2002, but excluded Mexico, Canada, and some developing countries (to avoid penalties). Bush’s foreign policy received major push back from European and Asian countries, who proposed retaliatory tariffs of their own, eventually leading to discussions at the World Trade Organization (WTO). In late 2003, the WTO decided that the tariff violated trade agreements and authorized billions of dollars' worth of sanctions. The WTO sanctions, international turmoil, and market downslide led to the United States’ withdrawal of the tariffs, more than a year prior to their scheduled termination, in December 2003. (

The graph featured above shows the impact of the Bush steel tariffs on the financial markets, the US Dollar, and yield rates. The S&P 500, the value of the US Dollar, and 10-Year bond yields saw a sharp decline beginning in March 2002, when the tariffs began, and continuing throughout the remainder of the year. The downtrend could be expected because the tariffs, seen as a bad thing for the economy, led to an increase in negative speculation causing the US Dollar to depreciate. The depreciation of the dollar adds to inflation increasing the likelihood of bonds defaulting causing yield rates to decrease. If Trump’s policy officially goes through, it may face a similar fate with already decreasing markets and future decreases in bond yields and the US dollar.

Currently, Trump’s tariffs face a significantly different economic climate than the recessions of Bush’s time in the early 2000s which could cause the current tariffs to fare better than the ones of the past. Additionally, there could also be an even greater negative effect because countries including Canada and Mexico currently would face the repercussions from the tariffs. The renegotiations of NAFTA in the coming weeks could change these terms. ( Considering Trump's unpredictable tendencies, the potential tariffs may serve as a negotiation tactic to create a better NAFTA deal. As Trump’s plans fully come to light, it will be interesting to see the possible resulting trade-war and whether Trump’s proposal produces a different economic result than Bush’s did 15 years earlier.

CNBC trade war story

CNBC Fed Chair Powell story

Zero Hedge post

CNBC story


By: Lexi Prochniak and Julia Jane Duggan

Supply shocks occur when there is a shift in the short-run aggregate supply curve. This could be due to a change in commodity prices, productivity, or nominal wages. There are both positive and negative supply shocks. A positive supply shock increases aggregate output and decreases aggregate price level, while a negative supply shock decreases aggregate output and increases aggregate price level. Therefore, with a positive supply shock, the graph shifts rightward and with a negative supply shock, the graph shifts leftward. While supply shocks are less common than demand shocks, their consequences are far more severe.

The economy has a harder time dealing with supply shocks than demand shocks, which is why the time periods following supply shocks, especially negative supply shocks, are much harsher than demand shocks. For instance, since World War II, there have been twelve recessions in the United States. Eight of these recessions were the result of a demand shock, which causes the aggregate price level and aggregate output to move in the same direction. The remaining four recessions were caused by supply shocks, and resulted in the lowest unemployment rates since World War II. Additionally, in each supply shock case, there was political turmoil occurring somewhere in the Middle East. The Arab-Israeli War in 1973 and the Iranian Revolution of 1979 were two events that both were factors of the supply shocks, as world oil prices were disrupted and thus greatly increased. The Great Recession of 2008 was also a product of a supply shock, and caused extremely low high rates of unemployment.

This graph clearly shows the jump in oil prices during 2008. This negative supply shock caused production costs to increase, thus causing the price of oil to greatly increase as well.

Thus, despite the fact that supply shocks do not occur often, they are nonetheless ruthless in their outcomes.  

Sources: FRED series CUUR0000SEHE and series NROU


by Mariam Samuel and Gareth Minson

President Trump has often been cited claiming that he will negotiate America’s debt through a lower rate of repayment. These claims give rise to many conversations about United States debt, specifically who owns it. The two largest holders of United States debt are the U.S. followed by China.

If Trump went through with his claims, the biggest population affected would be U.S. entities who own more than half of U.S. debt. At a lower buy back rate, the United States would incur the most losses as a result of being repaid less of the owed bonds. Also a point of concern is the large weight which other countries have on our debt with foreign countries owning over $6 trillion of around $20 trillion dollars of United States debt.

The data table shows the most recent data for the top 5 countries (other than the United States) holding U.S. debt in December. Although this is only one month’s worth of data, a look at the past year’s data correlates these countries’ holdings. It is interesting to note that out of the top five, only 2 of these countries are in the top five of U.S. trade partners.

[table content broken]

Economist Brad W. Setser, recently published an article emphasizing the importance of close surveillance of this data. His observations, focused on China, have revealed that China’s formal reporting underestimates their true holdings and reserves data. He goes on to explain that China holds more than U .S. treasuries, giving even more reason to need for further investigation.

The American markets are accustomed to significant purchases by foreign governments. In fact, these purchases have become quite significant. Daniel O. Beltran, Maxwell Kretchmer, Jaime Marquez, and Charles P. Thomas point out that foreign governments ownership of bonds grew 750% between 1994 and 2010. This figure has grown to $6.3+ trillion since 2010. The authors mentioned that the rapid rise in ownership of bonds had to do with emerging markets with large surpluses and America’s bonds being viewed as a safe place to store money. In their report back in 2012, the effects of the foreign investment slowing by $100 billion per month, it would be disastrous in both the short (40-60 points) and long run (20 points). While the Federal Reserve board’s numbers look bad, Christopher Martin, in a more updated study of the data, says that the numbers are only worse. The short run will see changes of 70-100 points and the long run will see a similar shift. To summarize, it is dangerous for the American bond market for emerging markets to see their growth slow because these countries will run smaller surpluses and will buy fewer bonds. As Rose and Katherine point out in their blog post, as the cost of bonds rises, the yield falls.

The Balance, Council on Foreign Relations, CNN Money and the Dept of the Treasury.


In macroeconomics consumer spending is measured by the household. Using this model, the most important determining factor of consumer spending is a family's disposable income. While salaries are typically how people report earnings, income after taxes and government transfers (disposable income) is the true measure of spending possibilities. The typical analysis of the relationship between a household's disposable income and its consumer spending is done via the consumption function, c= a + MPC x yd. In this equation c is consumer spending, yd is disposable income, MPC is the marginal propensity to consume, and a is household autonomous consumer spending (a constant).

From this graph we see the consumption function at work. The slope of the graph is the natural log of MPC, which stays relatively smooth over time. This is in line with the concept that over time our consumption stays constant. A point of note representing potential changes to our consumption is seen in 2008/2009 during the Great Recession. Because of this monumental event there was a decrease in many households' disposable income and therefore a decrease in consumer spending.

The aggregate consumption function shows the relationship between aggregate current disposable income and aggregate consumer spending. It has the same form as the household level consumption function, therefore its equation is also C = A+ MPC x YD, where A is the aggregate autonomous consumer spending (the amount of consumer spending when YD=0) and YD is the aggregate current disposable income.

As with any function, certain changes cause shifts in the aggregate consumption function. If something other than disposable income changes, which would simply cause a movement along the function, the function shifts. Two principle causes of this are changes in expected future disposal income and changes in aggregate wealth.

For example, an employee expecting a big promotion will typically increase their consumption due to this expectance of an increase in future displays income. This would cause an upward shift of the aggregate consumption  function. On the other hand, an employee expecting to be laid off from their job in the near future may decrease his or her consumption due to this expectance of decrease in future disposable income, causing a downward shift in the aggregate consumption function. An example of a change on aggregate wealth is having just paid off your mortgage; you have accumulated more wealth by owning your house and by having more disposable income to save and spend due to no longer having to pay that bill every month.

Flat World Knowledge and Krugman and Wells 5th edition.


Lee Bernstein, Faith Pinho, and Benjamin Schaeffer

Everywhere one turns there is more information and updates about the state of the economy. President Trump regularly comments on the Dow’s performance; yet this week the White House was assuredly disappointed in its underperformance - “DOW slides as US stock Market Suffers Worst Week in Two Years”. This past week, the Dow Jones Industrial Average, the most recognized stock market index, negatively affected other global indices, but why?

On February 2nd, the Bureau of Labor Statistics released an upbeat jobs report for the month of January. Over 200,000 jobs were added - although unemployment remained unchanged at 4.1%. While these numbers sound great to the layman, the markets did not expect such a promising report amid fears of increases in central bank interest rates. The United Kingdom’s FTSE 100 and Japan’s NIKKEI 225 plunged with the DOW. There is no surprise that if one market does poorly, especially unexpectedly, that the others will respond negatively, but for the average person it seems counterintuitive that an increase in labor participation would be a negative for Wall Street.

The problem lies with countries’ central banks. When the economy is doing well, the Fed or its counterparts around the world (like the Bank of England and the Bank of Japan) begin to increase increase rates, so that the economy does not grow too quickly. Just last week, the Bank of England hinted at raising its interest rates earlier than expected. In a recently published article, the BoE chief stated that interest rates increases would not be as high as reports suggested at the end of the last week.

This graph displays the FTSE, the DOW and the NIKKEI for the past two years. It shows how they seem to mirror each other. When one spikes or dips the others have a similar movement.

It is no shock that the world has become increasingly more interconnected in this century, and the stock market is no exception. In attempts to diversify stock portfolios, there has been an increase in the purchasing on international stocks, further entangling the economies of countries around the world. Due to the strength of the U.S. market many countries display great interest in what the DOW does because of interconnectedness between markets.

As the graphics below show, interest in the indicies, as measured through Google searches about them, saw a great uptick. We looked at Google search trends in the United States, Japan, and the United Kingdom. Both Japanese and British Google searches showed higher interest in their respective stock indices but also a fair amount of interest in the Dow Jones. On the other hand, Americans were only searching about the Dow Jones' performance.

This graph shows general Google search interest from users in the United States. The Dow Jones is in blue. The FTSE 100 in red and the Nikkei 225 in yellow. Google searches related to the Dow Jones were at their highest level this past week. There was minimal search interest in the Nikkei and almost no users were actively looking for information pertaining to the FTSE 100.
This graph shows general Google search interest from users in the United Kingdom. The FTSE 100 is in red. The Dow Jones is blue and the Nikkei 225 in yellow. Google searches related to the FTSE 100 were at their highest level this past week. There was considerable interest in the Dow's performance and almost no users were concenred with the Nikkei.
This graph shows general Google search interest from users in Japan. The NIkkei 225 is in yellow. The Dow Jones is blue and the FTSE 100  in red. Google searches related to the Nikkei were at their highest level this past week. There was considerable interest in the Dow's performance and while there was some interest with the FTSE 100, it is almost immeasurable.

The variation in the stock market this past week shows how sensitive the international markets are to slight fluctuations in domestic economies. The week began with a slew of news articles and updates about the Dow Jones’ severe downturn, with The Guardian citing it as the “worst week in two years.” As a previous post on this blog explained, the Dow Jones was responding to an expectation of the Federal Reserve’s change in interest rate as well as a surprisingly positive monthly job report. Markets continued to fall as Jerome Powell took his seat as the fed’s new chairperson. And yet, the week ended on an upswing, with the Dow Jones closing at the relatively normal 24,190.90.

Such fluctuations actually evidence a healthy ebb and flow of the international economy. Traders have grown accustomed to a less volatile market in recent years, but history shows that the stock market experiences peaks and troughs regularly within a week. But the influx of news articles on the Dow Jones and international markets last week would indicate otherwise. The mass media covered every slight fluctuation in the stock market last week, giving too much attention to small changes and neglecting to give the markets’ overall context. With such a sensitive, complicated and interconnected stock market, the general public should not be shocked by this kind of movement in the markets.


Rosalie Bull and Katherine Ingram

In a January 31st interview with Bloomberg Markets, Alan Greenspan, former chairman of the Federal Reserve, unknowingly anticipated the sharp drop in U.S. stock markets this week. Greenspan said, “There are two bubbles: We have a stock market bubble, and we have a bond market bubble.”

From last Friday to this Monday, the Dow fell over 1,800 points, its sharpest percentage decline since the European debt crisis in late 2011 and its largest point decline in history. Why did the market drop? One large reason is monetary policy by the Federal Reserve. The Fed is expected to raise interest rates three times in the coming year. The Fed tightens monetary policy to restrain an expansionary period and smooth out economic growth. Higher interest rates discourage borrowing as loans become more expensive. Financial assets, like stocks and bonds, are inversely related to interest rates.

The current value of a stock is based on investors’ belief in its future value. Higher interest rates cut into companies’ profit margins. Anticipating higher interest rates in the future, investors believe stock prices will fall. Another reason is simply that the Dow had been steadily rising throughout 2017. In the past 5 years, the Dow has risen from an average of less than 14,000 points to a little below 25,000 points. Analysts consider the plunge a necessary “correction” to maintain stability in the stock market.

Despite widespread concern about the falling stock market, Greenspan claims that the bond market bubble is a more critical issue for the US economy in the long run. Trump’s tax plan, which includes $1.5 trillion in tax cuts to the wealthiest members of our economy, paired with profligate government initiatives, is expected to lead to a large increase in the current budget deficit. This budget gap will be funded by debt spending, meaning that the US government needs to sell more bonds. The increase in bond supply lessens their market price, raising their expected yields (bond prices and bond yields are inversely related). Yields indeed hit a four year high Thursday --coming up from historic lows-- making them more attractive to investors than stocks, which are more volatile. The Fed is expected to raise interest rates, tightening monetary policy, in response to the low prices and high yields on bonds. Though bond yields generally fall with rising interest rates, the relative strength of the bond market compared to the stock market at the present moment has increased. Greenspan claims the consequences of the anticipated bond bubble are unlikely to be realized in the short term, but in the long term may lead us toward stagflation.

Critics claim Greenspan’s concerns are unwarranted; more representative of an availability heuristic than real market analysis. Matthew Graham, COO at Mortgage News Daily, believes Greenspan is attributing too much importance to a rise in bond yields and rates because he was an active economist during the 70s and 80s when a bond market bubble and collapse wreaked havoc on the American economy. Graham claims that most economists paying close attention would recognize the increase in bond market yields as simply a recovery from the historic lows of the recent past, not the beginning of an inflationary period.