The Short Run Weekly Issue 83

Fellow Shortrunners,

Tuesday will be historic for many reasons. Economically, it will mark the end of a rather disappointing 2001 for the US. More tangible however will be the mass deployment of the EURO currency and coin, set to begin January 1^st. Over 10 billion notes have been printed for circulation as nations across the continent work towards monetary union. The EURO has been a rather controversial idea for years now, and it looks like 2002 will provide the testing ground necessary to know what its true effects will be.

On the one hand, officials and supporters have argued that the bills providing a seamless form of transaction and eliminating currency transaction and risk between the participating EU nations will boost trade, goodwill, and hopefully Europe's ailing economy. Further economic ties should help to tone down nationalistic sentiment and disagreements in favor of the one Europe. On the other hand, introducing the currency is risky.

The hard logistical parts are already out of the way. Somehow politics have allowed for the creation of the EURO. Second, the specie has already been minted and is set to be distributed. Europe has been surviving (more or less) under its new monetary authority with several major players already having traded the EURO. Despite a slight recovery in the past few weeks, the EURO's exchange value relative to major currencies has been falling rather dramatically. The introduction of a new currency such as that of the EURO contains many more pitfalls too.

No matter how many security measures are implemented into a currency, the risk of counterfeiting still exists, especially when a new currency is being introduced. This is because a lot of these measures may not be known to merchants, vendors, and customers. Heck, although this may be hard to believe, and despite a massive public relations effort, it is still possible that a lot of Europeans may not know exactly what the currency looks like. This makes it easier for counterfeiters to pawn off fakes. Some economists have noted that whenever a currency base changes, there is a mark-up danger. When people are used to seeing prices denominated in one set of units, say marks, they may be more susceptible to being ripped off by higher prices in say EUROs.

The EMU knows better than most the dangers associated with introducing a new currency. They have planned for these dangers and many more. For example, they have made merchants post prices in both local currency and EURO denominations for quite some time now. Their publishing efforts of the EURO's design is important for several reasons. First, it helps train people to recognize the bills. Second, like most public relations activity, it is designed to build support for the new currency. Finally, by educating individuals about the currency and its security features, Europe can hope to thwart counterfeiters. In spite of all the worry, I tend to think that the ECB is right on track with its efforts toward currency introduction and that indeed in the end the EURO will be a net positive for the continent.

Sincerely,
Daniel Hicks

Economic Releases

The data section provides charts and data for the most important economic indicators.

Consumer Confidence: 93.7

During December, consumer confidence rose strongly to 93.7. The increase may portend some economic recovery, however the index is still far lower than in the past. Consumer confidence is often an important measure because a gauge of confidence in the economy can help to forecast future demand and investment activity.

Jobless Claims: 392,000

Jobless claims rose slightly last week. The small size of the increase is good news because it means that last week's lower release is not a fluke and perhaps there may be some sustained recovery in the labor market.

Durable Goods: -4.8%

Advance durable goods orders slipped in November, falling 4.8%. Analysts had expected that indeed durable goods would fall, as the previous month's increase was largely due to several key components such as defense expenditures which are subject to large one time orders.

New Home Sales: 934,000

A significant rise in new home sales such as that from September to November of this year has to mean greater demand. In this case I continue to believe that the strength in the housing market is induced mostly though lower interest and mortgage rates rather than through increased economic activity and confidence.

Existing Home Sales: 5.21 million

Like new home sales, existing home sales rose in November. The index has been trending upward over the past few months, despite its volatility and recession in the US. Existing home sales tend to rise more during hard times than new home sales, reflecting their relative prices.

ECRI Weekly Leading Index: 1.8%

The ECRI WLI, a composite index used to help forecast future economic activity in the US, continued to rise last week. Analysts who watch the figure say that the index is suggesting recovery for the US economy some time in mid 2002.

Classroom

Check out the new classroom section and watch for it to grow and change in the coming weeks as we implement drastic reconstruction to the section. Comment and suggestions as to the best method for this kind of a section would be extremely helpful.

Articles / Book Reviews

Newest Articles:

Balance East and West
- Contributed by Kautilya AKD

Bush's Tax Plan Just Doesn't Cut It
- by Alex Rothenberg

Newest Book Reviews:

Money and Power by Howard Means
The Firm, The Market and The Law by Ronald Coase
Megatrends Asia by John Naisbitt
Geography and Trade by Paul Krugman
Fuzzy Math by Paul Krugman
Growth Theory: An Exposition by Robert Solow