Great cartoon about the deceptive ways of the Federal Reserve

Great cartoon in the Washington Post illustrating the deception from Fed officials that I discussed here and here . Thanks, B.K. Marcus for the link.

Was real GDP revised up or down?

Today's revised GDP report showed how it is important to check the details and not just the headline. To be sure, the revisions are so small that given the margin of error that exists it don't mean much, but like yesterday's post on the Hong Kong GDP report it illustrates the principles with which to analyze.

On the one hand, the headline number, that is the volume measure was downwardly revised from 3.4% to 3.3%.

But on the other hand, as the GDP price index was upwardly revised nearly as much and as the domestic purchases price index was downwardly revised by nearly 0.1%:point, the lower deterioration of America's terms of trade means that the recorded purchasing power of Americans was unchanged or very slightly (less than 0.1%:point) upwardly revised.

However, as government consumption was upwardly revised by $2.7 billion, this means that more than the entire minuscule upward revision is eaten up increased diversion of resources to government, meaning that private sector purchasing power was revised down.

Moreover, the news that the factor income surplus declined means that national income grew slower than GDP.

Another new fact not revealed in the former realease was that corporate profits surged to a new record of 11.1% of national income, up from 10.0% in the second quarter of 2004 and 8.5% in 2002. This could implicate that business investments will likely continue to surge.

Jude Wanniski dead

Leading supply-side economist Jude Wanniski died yesterday. While I sometimes disagreed with him, particularly on monetary policy, his writings were mostly good. While I never met him in person, I appreciated the interesting and intelligent comments to my articles that he sent me and he gave me the clear impression of a courageuos and sympathetic man. May he rest in peace.

Hong Kong GDP growth accelarates further

First quarter GDP growth in Hong Kong rose to 6.8% in the second quarter according to the volume measure. Quarterly growth was 3.0% which translates into a annualized 12.6%.

However, adjusted for the deteriorating terms of trade growth was "only" 4.8%. This of course is far higher than in either the United States, the European Union and Japan, especially since their terms of trade is deteriorating too because of the oil price increases. The volume year over year GDP growth of 3.6% in the US is only 3.1% after adjusting for terms of trade.

On the other hand, unlike in the United States where government consumption has increased with 5.9% in nominal terms, only marginally less than the 6.1% GDP growth, the people of Hong Kong are increasingly getting to chose themselves how to spend their money. Nominal GDP increased 5.7% in Hong Kong, yet government consumption fell 4.5%. Government consumption is now only about 9% of GDP in Hong Kong compared to 19% in the United States and 30% (including government "investments") in Sweden. This is good both as an end in itself as it means that the people of Hong Kong are able to spend their own money which will give it a higher utility and also because the lower tax and deficit burden it will allow will improve the competitiveness of the economy.

Adjusted for both terms of trade and government consumption, growth was more like 5.9%, nearly twice the US level (more than twice after adjusting for population growth) and a multiple of European and Japanese levels, illustrating the benefits of laissez faire policies which Hong Kong pursues more consistently than any other country in the world.

Paul Krugman's confusion about Greenspan and the housing bubble

When I first saw the headline of today's Paul Krugman column, "Greenspan and the Bubble" I felt hopeful. Might Krugman again get a temporary lapse into economic sanity and pinpoint the blame for the housing bubble on the Fed's cheap money policies?

No, instead he blames the bubble on some comments by Greenspan. While those comments should indeed be criticiized it is ludicruos to blame the bubble on the comments rather than his policies.

Moreover, in the end Krugman criticizes a valid observation from Greenspan. Namely that the end of the housing bubble should reduce the trade and current account deficit. He writes:

"And here's where Mr. Greenspan is still saying foolish things. In his closing remarks he suggested that "an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports and a corresponding improvement in the current account deficit."Translation, I think: the end of the housing bubble will automatically cure the trade deficit, too.

Sorry, but no. A housing slowdown will lead to the loss of many jobs in construction and service industries but won't have much direct effect on the trade deficit. So those jobs won't be replaced by new jobs elsewhere until and unless something else, like a plunge in the value of the dollar, makes U.S. goods more competitive on world markets, leading to higher exports and lower imports."

Hu? First of all, who said anything about replacing jobs? Reducing the trade deficit isn't the same as replacing jobs. Secondly, it is surprising to see a leading trade theorist like Krugman assert that currency movements is the only thing determining trade balances. As he of all people should know, the end of the housing bubble would mean a reduction in domestic demand something which would partially translate into a lower trade deficit. Moreover, a end to the housing bubble is likely to lead to a weaker dollar is it would make it likely that the Fed would reverse course and start cutting instead of raising interest rates.

Swedish FDI falls to zero "despite" the welfare state

New blog post at the Mises blog. And please note, this was blog post number 4000!

Japanese politicians promise spending cuts

Elections are usually a repulsive contest where all the politicians try to outdo the other candidates in handing out money looted from the tax payers. A "advanced auction in stolen goods" as H.L. Mencken put it. Yet in a story (not available online for nonsubscribers) in the latest issue of The Economist, it is revealed that the Japanese election has a much more pleasant character. Prime Minister Kuizumi and his Liberal Dmocratic Party has undertaken some structural reform and reduced the wasteful public investments from 8% of GDP to 5% of GDP and is promising to continue along that path in order to reduce Japan's large budget deficit without raising taxes. But the opposition party Democratic Party of Japan now wants to go even further and cut public investment in half to 2.5% of GDP and implement privatisations. They also want to improve Japanese relations with the rest of the world by withdrawing troops from Iraq and not continue Kuizumi's provocative visits to the Yakusuni shrine, which in China and Korea is regarded as a shrine in honor of Japanese war criminals.

Of course, for a hard-core libertarian this is far too moderate. But for being politicians it is very good-if they keep their promises which we of course cannot be sure of.

A perfect example of the "core inflation" deception

I recently wrote a article explaining why the so-called core inflation rate is a nonsensical concept. In it I pointed to how it is often the case that while the all-items index come in higher than expected while the "core" rate mysteriously come in lower than expected and how this strangely is met with cheers and a bond rally. The reason for the higher than expected all-items index and the lower than expected core index tend to be the same: namely higher energy prices. Higher energy prices will raise the all-items index, but lower the core index both indirectly through the effect of reduced purchasing power for consumers and directly through the calculation of homoeowner's equivalent rent which is calculated by checking the level of rent and then assume that this is the "implicit rent" paid by home owners. However, home owner's rent is deducted by fuel costs since tenants aren't assumed to pay fuel and in the absurd logic of the U.S. government this means that unless rents are instantly raised (which they rarely are), implicit rent for home owners are decreased with the same amount as their fuel costs are increased. Even though home owners in the real world don't get any cost cuts to cancel out the increased fuel costs , this is what the CPI and PCE deflator indexes assume.

The latest CPI report was a perfect example of this. The CNN Money article on it announces in its headline that there was a "mixed reading" with all-items up more than expected and core up less than expected. And if you look at the specifics you see that rent was up 0.3% but home owners equivalent rent up only 0.2% no doubt reflecting the increase in fuel costs.

And with the nonsensical (Nonsensical from the point of view of the Fed. Given the Feds stance however it makes sense for the bond market to also do so, since it is ultimately the Fed that controls interest rates) focus on the core index, bond prices predictably rallied .

Leaving socialist societies

Paul Krugman recently praised The French welfare state, yet young people in France don't seem to agree with him as the welfare statist regulations have made it extremely difficult to get a job and increasingly they therefore wants to leave the country according to a article in The New Scotsman.

Sweden is facing similar problem with thousands of highly educated Swedes leaving the country each year, with the US and the UK being the most popular destination. Last year, Net emigration of Swedes was more than 5,000, a number likely to increase this year. The situation is likely similar in other highly welfare statist Western European countries. While both France and Sweden receives a lot of immigrants from Africa and the Middle East, they are usually not as productive (indeed a substantial portion of them live exclusively off the welfare state)as the emigrants.

Gold tops $450

Gold have now topped $450 and is now near the 16-year high of $456.75 reached in December last years.

Now I don't myself read that much into the movements of the gold price whose movements often are unrelated to monetary factors, but so-called supply-siders have often claimed to view gold together with other commodity prices as the only important gauge when determining whether there is inflation or deflation and when the gold price in 1999 fell as low as $250 this was taken as evidence of "deflation".

But now that gold prices are rising they are strangely not viewing this as inflation. Interestingly Larry Kudlow in his October 20 2003 NRO column wrote that "Had gold moved up to $425 or $450 it might have triggered high-interest-rate inflation expectations.". Now that gold prices are over $450, gold prices as a indicator of inflation have been thrown into the memory hole. He interestingly have also shifted focus from the CRB Futures Index which he used to focues on and which includes oil and gold to the CRB Spot Index which excludes oil and gold and also has in other aspects a different composition. Is it a mere coincidence that he decided to shift gauge at a time when the two indexes diverged strongly, with his old gauge increasing 20% and his new gauge being unchanged?

Is the housing boom slowing?

New blog post at the Mises blog.

Not quite like the gold standard

Johnny Munkhammar of the Swedish free market "think tank" Timbro have written a interesting op-ed column [In Swedish] in Sweden's fourth biggest newspaper, Svenska Dagbladet. In it he points out correctly that the root cause of the economic woes of the three biggest Euro-zone economies, Germany, France and Italy (as well as many of the smaller economies in Western Europe, both inside and outside the Euro-zone) are the so-called "social model". Yet the crisis is falsely blamed on free trade, EU enlargement and the euro. Munkhammar also points out that if for example Italy were to reintroduce the lira in order to devalue it and inflate even more, this would not solve Italy's problem and would make Europe poorer. So far so good.

In his article, Munkhammar also argues that the euro is equivalent with the gold standard in that they both take away the ability of national governments to temporarily hide the problems through inflating and devaluing. He does however express disappointment that this have not lead European politicians to institute free market reforms.

What Munkhammar overlooks is that the reason why the euro hasn't functioned as well as a gold standard would have is because of the fundamental difference between a fiat monetary union ( at least one whose policies are like current ECB policies) and a gold standard. Namely that the former means that a transnational central bank can inflate in a way which will enable the national governments to escape structural reform in a similar way to the conditions with national central banks.

And since the ECB have -contrary to the widespread but absurd myth of it being a inflation hawk- in fact been so inflationary ( See here ,here ,here and here),monetary conditions have been very loose in stagnating economis like Germany and Italy which means that these countries have at least as far as interest rates is concerned had a keynesian monetary policy, even though it hasn't been decided there. Meanwhile the imposition of this inflationary monetary policy has also lead to the creation of housing bubbles in fast growing countries like Ireland and Spain-and interestingly enough in slow-growing France and Italy too.

The idea of taking away the power of inflating at will from national governments is a good one for several reasons including that it could help pressure governments to do away with socialist economic policies. But for that to work, what replaces national monetary policy cannot act as if it were the keynesian monetary policies of weaker countries-which the ECB have in fact done but which a gold standard wouldn't have done.

Credit boom accelerates

The latest statistics On bank lending from the Federal Reserve show a sharp $29.6 billion increase in bank lending for the latest week. Weekly numbers are of course very volatile and their movements should thus be interpreted cautiously, but recent trends point in the same direction, with bank lending increasing no less than 13.8% since the beginning of the year and 11.1% since a year before. As has consistently been the case for the last few years, real estate loans have increased even faster, up 15.9% at annual rate since the beginning of the year and up 15.4% since a year before. What is interesting is that recently, loans to businesses have increased even faster after having declined previously for the last few years. After having declined by 19.5% from its February 2001 peak to its May 2004 lows, business lending have increased sharply, although it has not yet reached the February 2001 peak. Since the beginning of the year business loans have increased no less than 19.7% at an annual rate while being up 12.8% since a year ago. This indicates that the current economic expansion is increasingly driven by business investments, just as I predicted i my Las Vegas speech .

The Fallacy of the "Core" Rate of Inflation

See my LRC article on why it makes no sense at all to care about "core" consumer price indicies except as a way to cover up the inflation problem.

Official U.S. households savings rate at zero

While today's report on personal income and spendingin June showed slightly stronger income growth and slightly lower increase in the PCE deflator than expected, another item was negative: the US household savings rate fell to 0.0% in June, the lowest since the Great Depression. Some people have argued that this measure understates the true savings rate since it does not include capital gains. This argument is actually to a limited extent correct. A correct measure of savings would apart from dividends also include the implicit dividend that exist in the form of retained earnings and because of this the true savings rate is somewhat higher than zero. But including capital gains completely would greatly overestimate savings. To the extent that a capital gains is the result of higher retained earnings it should be included, but including capital gains based on expected higher future earnings would in fact mean spending money that haven't yet been earned. And including capital gains based on asset price inflation (higher stock price relative to expected earnings) is even worse, because the gains for the sellers would be counteracted by lower purchasing power for the buyers.

The Economist: Austrian school provides the best explanation

New blog post at the Mises blog.