Make Money-Not War

U.S. computer chip gigant Intel have decided to invest $300 million in Vietnam.

As most readers of this blog are surely aware of, the U.S. government made a misguided attempt to protect Vietnam from the communists with military intervention during the 1960s and first half of the 1970s, a mistake that caused great financial and human costs both for America and Vietnam. Ultimately, the U.S. government was forced to abort this intervention under humiliating forms.

However, luckily, the triumph of communism in Vietnam proved to be short-lived. While Vietnam still supresses free speech, it have like China -but unlike North Korea and Cuba- ditched the communist economic system and instead become increasingly capitalist.

And so now, Americans and the Vietnamese now deal with each other under more constructive and mutually beneficial forms, to make money and not war, as the Intel investment in Vietnam shows.

U.S. Growth Revised Up-Particularly Nominal Growth

As most analysts had expected , U.S. GDP growth for the fourth quarter were upwardly revised, from 1.1% to 1.6% in volume terms. The upward revision was from 0.7% to 1.3% in terms of trade adjusted real terms and from 4.2% to 5.0% in nominal terms.

The upward revisions were the most significant both in real and even more so nominal terms in the areas which surprised the most on the downside in the first estimate, namely business investments and government purchases. Business investments gowth were upwardly revised in real terms from 2.8% to 5.4% and from 6.6% to 9.5% in nominal terms while government purchases were upwardly revised from -2.4% to -0.7% in real terms and from 2.1% to 4.9% in nominal terms. Also contributing to the upward revision were higher inventory build-up and slightly higher private consumption. Residential investments were however downwardly revised, while the trade deficit were upwardly revised.

The big positive for the U.S. economy in this report apart from the upward revision of the overall number is particularly the upward revision in business investments, as well as a upward revision of the savings rate from -0.4% to -0.2% on account of a upward revision of personal income for the third and fourth quarters.

There are however a few negatives as well, namely the higher trade deficit, the higher inflation and the higher burden of government. And particularly the latter issues are reported in a misleading way by most news outlets. This report for example would have you believe that inflation was in fact revised down and that government spending decreased. Both claims are false because of the misleading focus on the "core" rate of consumer price inflation. While the core rate of consumer prices were downwardly revised from 2.2% to 2.1%, the price index for domestic purchases (the most relevant measure of inflation) was upwardly revised from 3.4% to 3.6%. And because the prices of government purchases is increasing so rapidly , 5.6%, government spending rose in fact 4.9%, rather than the alleged decrease that news story cites on account of the volume measure. This is only a shade lower than the 5.0% nominal GDP growth. Indeed if you take the high rate of inflation for government purchases into account, government purchases have increased faster than the private economy during the last year, 7.1% , compared to the 6.4% nominal GDP increase.

As for the first quarter number, we should particularly expect much higher consumer spending growth on account of the extraordinarily strong January number and probably also higher growth of business investments and government purchases. This will probably be partially counteracted by a continued increase in the trade deficit which likely increased to at least $70 billion in January, as well as probably no positive contribution from inventories (which contributed with 1.62%:points to fourth quarter growth). All told however, total growth will certainly rise significantly from 1.6%, maybe up to 4%. Some analysts expect an even bigger increase, up to 5% growth, but I think they probably underestimate just how much the trade deficit will likely rise.

Sweden Defeated Finland-But Only in Hockey

It is hardly an exaggeration to say that Sweden is euphoric after defeating archrival Finland in the hockey finals in yesterday's final in the Winter Olympics. Swedes won 6 other gold medals in the Olympics but for most Swedes the hockey gold is better than all the rest. It would be inaccurate to describe me as a Swedish nationalist, but I was still happy about this victory.

But while the Swedes beat Finland in hockey, the Finns beat Sweden in economics. During the latest year, employment rose by 2.3% in Finland, while employment growth in Sweden was a mere 0.5%.

Unexpected Increase in Swedish Trade Surplus

The Swedish trade surplus in January 2006 unexpectedly reversed the declining trend we saw during 2005 . Part of this increase was a pure "calendar effect" with the number of working days being one more than January 2005. But even adjusting for that the surplus increased. This reversal was primarily due to increased export growth, rather than lower import growth. That would suggest strong Swedish economic growth in January.

It is too early to say for sure whether this was a temporary abberation or whether it represents a end to the trend of a falling trade surplus. It seems more likely than not, though, that it was just an abberation. Despite the small rate hike last week, credit-driven demand in Sweden remains strong something which should mean continued strong import growth. Meanwhile, export orders have been quite weak recently, something which suggest that export growth should slow down significantly.

Hong Kong Budget Move Into Surplus -So They Cut Taxes

Rapid economic growth as well as spending reductions in Hong Kong means that their budget deficit have been turned into a surplus. So now, pressured by increasing competition from both Shanghai and Singapore, they wisely decide that they will cut their already very low tax rates. To bad we can't have politicians like that.

Supply-Side Split Over Inflation

New blog post at the Mises blog.

Euro-Zone Current Account Balance Turns Negative

The ECB today reports that the Euro-zone current account balance detriorated rapidly in 2005, as the 2004 surplus of €43.5 billion was turned into a deficit of €29.0 billion. The deterioration accelerated in the last few months of the year. The December 2004 surplus of €2.7 billion was for example turned into a €5.3 billion deficit in December 2005.

This is yet another symptom of the loose monetary policies of the ECB and it illustrates that deficient demand is not what is causing sluggish Euro-zone growth. Instead it is supply constraints caused by excessive taxation and regulations.

Japanese Growth Strong As Expected

Just as was widely expected, GDP growth in Japan came in very strong for the fourth quarter of 2005, with GDP volume increasing 5.5% at an annual rate from the third quarter, and 4.2% from the year before. This means that GDP growth in Japan is not just stronger than in Western Europe, but also stronger than in America, although it is still of course lower than in China.

Going through the specifics of the report there seem to be no real negative aspects of the report.

-Growth was not based on inflationary monetary policy as money supply growth was weak. As a result of continued weak money supply growth and increased supply of goods, the rate of price deflation actually accelarated. Because of the high price deflation, real interest rates is actually higher than in America and Europe, further underlining that this boom is not based on unsustainable inflationary monetary policies. The high real interest rates have made the Japanese private sector reduce their debts and strengthen their balance sheets.

-Growth was not based on increased government spending, as government purchases actually declined from the previous quarter and rose far less than total GDP from the year before. This is in sharp contrast to America, where government purchases have increased slightly relative to GDP. It also means that the increase in the burden of government we saw in the third quarter seems to have been an abberation.

-Instead, growth reflected a broadbased increase in private demand, with private consumption, residential investments, business investments and the current account surplus all increasing strongly. Somewhat surprisingly, inventories gave no positive contribution to GDP, something which bodes well for the first quarter.

The only thing that could be construed as "negative" is that the deterioration in terms of trade accelerated somewhat, mostly due to higher prices on imported oil. But this is not really a negative, it just means that the headline volume number exaggerates real growth somewhat (why volume numbers that don't take terms of trade into account can be misleading see here).

Adjusted for terms of trade, real GDP growth was an annualized 4.3% compared to the quarter before and 3.2% compared to a year before. This is still higher than both the U.S. and Western Europe. The U.S. for example, had annualized growth of only 0.7% compared to the quarter before and 2.8% compared to the year before.

Moreover, if one considers that Japan have a shrinking population, compared to less than 0.5% population growth in the Euro-zone and 1% population growth in the U.S., Japan have a even bigger lead in GDP per capita growth than in GDP growth. In addition, Japan have a rapidly rising investment income surplus from abroad, meaning that real national income is growing even faster than GDP. By contrast, net investment income in both the U.S. and Europe is deteriorating meaning that their income growth is slower than GDP.

This is not to say that there aren't problems in the Japanese economy. The rapidly declining working age population means that growth is likely to be held back significantly in the future, although the effect of this could be mitigated if the Japanese is able to increase the average retirement age. Moreover, while private sector balance sheets are healthy, the government budget deficit is far too high, particularly when considering the aforementioned aging population. Indeed, the budget deficit is even higher relative to GDP than in America-or in Germany and France.

But still, while the aging population and the high budget deficit poses long-term dangers to the Japanese economy, the short-term outlook seems strong. Japan will likely outperform both America and Western Europe during 2006 in terms of GDP growth.

Swiss Canton Lowers Corporate Income Tax to 6.6%

The Swiss canton of Obwalden, have decided to cut taxes for individuals and especially for corporations which now only have to pay 6.6% in corporate income tax (Thanks Larry Kudlow for the link ). EU bureaucrats have objected to this, claiming that it violates the trade agreement between the EU and Switzerland, but the Swiss have wisely decided to tell the EU bureaucrats to go stick their objections up where the sun don't shine.

How to Know You're Doing Things Right

Denmark's liberal prime minister Anders Fogh Rasmussen mentions in an interview in the German news paper Der Spiegel a good way of knowing that you are pursuing the correct policies:

"SPIEGEL: Then why did your Swedish colleague Goran Persson criticize you and say he would have never underestimated such a situation?

Fogh Rasmussen: First, he is not in my situation. Second, I would never get involved in any domestic issue in Sweden. And third, I am especially honored to be attacked by the Swedish Social Democrats -- it is a sign that our policies are the correct ones."

Soaring Private Consumption in America

After increasing a mere 1.1% during the fourth quarter, private consumption in America looks set to increase sharply during the first quarter of 2006. Retail sales increased 2.3% in January compared to December, following a downwardly revised 0.4% gain in December. While some of that gain reflects inflation (retail sales numbers are expressed in nominal and not real terms) and while non-retail private consumption probably increased a lot slower, this still means likely a sharp increase in real private consumption. That in turn means that first quarter GDP growth in America will be far higher than the weak 1.1% during the first quarter.

It also means that the U.S. trade deficit will continue to soar. The unexpected gain in the Chinese trade surplus in January likely reflected the strong retail sales in America. The U.S. January trade deficit will therefore probably rise to at least $70 billion.

Mixed Economic News From the Euro Zone

So far, 6 of 12 Euro-zone members have announced preliminary estimates of fourth quarter GDP growth. According to these numbers, some countries, including Finland, Holland, Spain and Greece saw growth of around 4% at an annual rate from the quarter before. However, the two largest economies performed much worse, with Germany experiencing near zero growth and France having growth of only 0.8% at an annual rate. While these numbers could be revised both up or down somewhat, the overall picture is not likely to change. Among those who haven't published their numbers, we could expect continued strong growth from Ireland and Luxembourg and mediocre numbers (at best) from Italy, Portugal, Austria and Belgium. This means that Eurostat's "flash estimate" of 1.2% annualized growth for the Euro-zone as a whole is likely to hold true more or less as the strong performance from some of the small and medium sized economies is overwhelmed [In the aggregate Euro-zone GDP statistics] by the stagnation in the big three-Germany, France and Italy.

This relative weakness could be transitory and the Euro-zone could perhaps regain the momentum we saw in the third quarter. The number for France was for example temporarily depressed by the riots they experienced that quarter, something which should mean higher first quarter growth. But if it isn't, then the expected rate hikes from the ECB will be limited, something which in turn would mean a weaker outlook for the euro on the currency exchange markets than I previously expected.

UPDATE: I see now that Austria had an annualized growth rate of 2.8% in the fourth quarter, somewhat worse than Finland, Holland, Spain and Greece, but still fairly strong by Western European standards. It is however not strong enough to lift the Euro-zone average above 1.2%.

Has Sweden Really Outperformed Australia?

The Swedish Social Democratic government gloated over PPP-adjusted GDP per capita numbers from the OECD for 2005 which showed (or claimed to show) that Sweden have moved up from a shared 12th place (with Belgium) to a shared 11th place (with Australia).

Yet there are several strange things about these numbers. First, how can the OECD already publish 2005 numbers when most countries haven't published fourth quarter numbers? And the few that have done so ( like the US, the UK and South Korea) published only highly preliminary estimates which are likely to be revised. And there can be a lot of revisions expected for the numbers of the three first quarters. The OECD have, it would seem then, published numbers based on their forecasts, forecasts which are likely to differ somewhat from the actual numbers.

A even bigger problem however is that the OECD do not seem to have adjusted their numbers for changes in terms of trade, which is why they have come up with the false result that Sweden have outperformed Australia in the latest year. As fourth quarter numbers are not available yet, I used the numbers for the first three quarters of this year.

During this time, the volume measure of GDP rose by 2.5% in Sweden and 2.35% in Australia. And as Australia have a far higher population growth than Sweden, 1.2% versus 0.4%, this means that GDP per capita seemingly increased 2.1% in Sweden versus 1.1% in Australia. This, it seems, is the basis for the OECD's claim that Australia's GDP per capita fell from 114% of OECD average to 113%, while Sweden held steady at 113%.

But, these numbers are based on the faulty methodology of deflating nominal GDP increases with the GDP deflator, a price index that includes export prices but not import prices. To see how absurd this methodology is, imagine a self-employed barber who for the sake of simplicity is assumed to have no fixed costs and who live in a country with zero inflation . Say that he cuts his price by 50% and that this means that the number of customers increase 60%. Even though his nominal income falls by 20% and his cost of living is unchanged, the absurd volume measure of GDP would have us belive that he really is 60% better off! Pure common sense tells us that in reality he is 20% worse off. The common sense measure takes terms of trade changes into account and deflates nominal income changes with the price changes of the goods the producer buys, not the price changes of the goods he sells.

And if we take terms of trade changes into account and deflate nominal GDP increases with the price indexes for domestic demand rather than the price indexes for domestic production, the relative economic performance of Australia and Sweden changes dramatically. If you look at the Australian numbers more closely you could see that domestic demand in Australia rose 3.9% in real terms and that the 2.35% number assumes a sharp increase in the trade deficit. But if you look at current (actual) prices in the same release the Australian trade deficit actually shrank from A$18.3 billion to A$15.3 billion, as opposed to the increase from A$22.4 billion to A$32.3 billion assumed in the volume numbers. The reason for this discrepancy is that the volume numbers do not take into account the vastly improved terms of trade for Australia. During this period, export prices rose no less than 11.2% while import prices rose a mere 0.2%. Taking terms of trade into account, Australia's GDP rose by 4.35%. That in turn translates into a 3.1% increase in GDP per capita.

For Sweden, the effects of adjusting for terms of trade is less dramatic, but it is negative. Nominal GDP rose 3.4% during the first three quarters of 2005, which deflated with the GDP price index increase 0f 0.9% means a 2.5% volume growth. But if you deflate the nominal GDP increase with the more relevant price index, that for domestic demand which increased 1.3%, real GDP growth was only 2.1%. And with a 0.4% population increase, real GDP per capita increased 1.7%.

So, far from being the case that Sweden had 1% higher GDP per capita growth, the terms of trade adjusted numbers show that Australia had 1.4% higher GDP per capita growth. As Australia was already ahead, that also means that Australia's PPP-adjusted GDP per capita is higher than Sweden's.

The Sun Seems to be Rising in Japan

The Japanese recovery from the stagnation of the 1990s have been quite uneven in the recent two years, with some quarters showing red-hot growth while others have seen stagnant growth. These fluctuations will likely continue, but the overall trend does seem positive. And right now, growth appears to be very strong. Last Friday, numbers showed that private machinery orders surged 6.8% in December compared to the month before, building on two previous months gains.

Despite this surge in investments, Japan's current account surplus rose 8.6% from the year before to 1.75 trillion yen in December, as a 11% decline in the trade surplus was more than offset by a 38.1% increase in net investment income from abroad.

Economists now on average expect GDP growth in Japan to be a full 4.9% at an annual rate in the fourth quarter (Far higher than in both America and the Euro-zone), with Morgan Stanley being the most optimistic with a forecast of 7% growth. Preliminary numbers on Japanese growth is due on Friday, February 17th. We will then see whose forecast came closest (I haven't studied the data close enough to dare make a forecast of my own).

Chinese Trade Surplus Increases Again

While the heading to this Bloomberg news story talk of a decrease in the Chinese trade trade surplus for January, this was compared to the figures for December, a comparison of limited interest since neither number is seasonally adjusted and since December surpluses for seasonal factors tend to be much larger. Compared with January 2005 however, the surplus rose from $6.4 billion to $9.5 billion, reflecting a 28% surge in exports outpacing a 25% increase in imports. This means that after having stagnated for two months, the trade surplus in China have again started to increase.

This is likely to mean that the pressure on the Chinese to increase the foreign exchange value of the yuan is likely to increase. After the 2.1% revaluation in July from 8.28 yuan/$ to 8.11 yuan/$, the yuan have only strengthened 0.8%, to 8.046 yuan/$. While the pace of appreciation have increased somewhat, with the gain being 0.28% the last month, compared with a monthly average of 0.1% the previous 5 months, this is still far to little to have any significant impact on the trade balance. While I myself is not bothered by the Chinese trade surplus and while I am generally skeptical to the Friedmanite "exchange rate flexibility" idea, a stronger yuan is appropriate in the current circumstances, since we are otherwise likely to see a increase in formal trade barriers, something which is worse both for the Chinese and for us. Moreover, a smaller trade surplus would reduce Chinese purchases of U.S. government bonds and thus raise bond yields, which in turn means that the seriousness of Bush's fiscal recklessness would be more apparent.

Yes, You Do Have to Be Conspiracy Minded to Believe That

After a few Swedish corporate executives stated that they would prefer that the centre-right opposition to win this year's Swedish election, Social Democratic leader Göran Persson implied that if the CEO:s don't shut up, he might move to change legislation that allow differential voteing rights for stocks. After the executives then replied that they won't be intimidated by that threat, Social Democratic party secretary Marita Ulvskog now claims that the corporate executives are abstaining from investing just to give the Social Democrats a hard time.

Puh-lease! Give me a break. As if corporate executives constantly pressured by their shareholders to create higher profits could afford to abstain from investments necessary to keep the company competitive.

When asked if she had any evidence for her claim she admitted that she didn't have any evidence except that investments hadn't increased as much as dividends-as if that established the motive. A far more plausible explanation is that there isn't as many profitable profit opportunities as she claims.

Ironically, when telling of her theory she phrased it as "you don't have to be particularly conspiracy minded to believe it". I for one would say that in order to push for a implausible theory without any evidence, then you'd have to be verfy conspiracy minded to believe it.

Sweden On Marketwatch

There is a story on Sweden on Marketwatch. Looks mostly correct in what it says, although it fails to mention Sweden's problems with mass unemployment. It mentions the case of Skype, which was founded by Swede Niklas Zennström, but who moved to low tax Estonia to escape Sweden's high taxes.

Greenspan Revisionism From Samuelsson and Boudreaux

New blog post at the Mises blog.

U.S Labor Market Strengthens

While the single most closely watched number in today's employment report for January, the "non-farm payrolls" were somewhat weaker than expected, most other numbers came in a lot stronger than expected, particularly the unemployment rate and average hourly earnings. Overall, it was clearly a strong report.

Particularly interesting is the increase in average hourly earnings. Wages have been growing only slowly in America the two most recent years and adjusted for inflation they have in fact fallen. They may still have fallen in January as energy prices rebounded, but if they continue to increase by 6 to 7 cents per months as they have done for the last two months, wage increases will start to outpace inflation.

Higher wage increases could mean three different things (or a combinations of two or all three things): 1) Higher productivity 2) Lower profits 3) Higher inflation.

The first is clearly good, the second more ambiguous and the third clearly bad. So which is it? That is hard to say since we don't have all the data available, but it is likely a mostly the third and to a smaller extent the second. As production growth shows no signs of accelerating while growth in hours worked accelerates , productivity growth is in fact falling. Fourth quarter earnings reports showed continued high profitability except in the Detroit car industry, but it is possible that first quarter earnings are weaker and/or that smaller businesses are doing worse than big business. The lower unemployment rate should mean stronger bargaining power for most workers and thus halt the relative shift in the distribution of income from labor to capital. Meanwhile, the sharp increase in commodity prices will likely help push up inflation, especially if pay increases also accelerates.

The boom in commodity prices have helped sharply boost mining activities. While total hours worked in the private sector rose 2.6% between January 2005 and January 2006, hours worked in the sector "Natural resources and mining" rose a full 9.1%. Average hourly earnings also increased faster between January 2005 and January 2006 in that sector, 3.9% versus 3.3% for all private workers.

The higher inflation will likely mean that the Fed funds rate will be raised to at least 5%, maybe even higher. That in turn could mean that the dollar will do somewhat better than I previously thought, provided at least that the current labor market strength continues.

Well, I'll Be Damned.

In Western countries we are used to seeing leftists argue for higher taxes. But in the Philippines they are actually fighting a tax increase. Why can't our leftists be like that?

"A higher sales tax has come into force in the Philippines, where it is expected to hit consumers already struggling with rising fuel costs.

President Gloria Arroyo's government says raising the value-added tax (VAT) rate from 10% to 12% is a key reform....

.....But the broader and higher tax has proved deeply unpopular as millions of impoverished Filipinos try to cope with higher fuel, electricity and transport costs following a surge in global oil prices.

Leftist groups held small protests around the country against the VAT changes."