Saturday, December 30, 2006

I Wonder What Satan and Saddam is Doing Now?

"-I love you, Satan!
-I love you too, Saddam!"

See also the transcript of these two South Park episodes:
Do The Handicapped Go To Hell?
(Btw: no, I don't believe in the existence of Satan or Hell, but it is an amusing thought....)

Saddam is Dead-Great Opportunity to Get Out

So Saddam Hussein is finally dead-more than 3 years after he was captured. Given his obvious guilt, this was amazingly slow.

This provides Bush with his perhaps last chance to get out of Iraq semi-honorably. Now he can say: "OK, now the old dictator and his sons are all dead. The reign of the Hussein clan is thus irrevocably finished. Now it is up to you Iraqis to run your own country. Whatever threat Saddam may have posed to us is over so our mission is now accomplished (if you pardon my repetition of that phrase). We wish you good luck, but we are not going to sacrifice ourselves in a vain effort to prevent you from killing each other. That is your business, not ours, so we will now leave".

By again narrowing the definition of success to ending whatever threat Saddam allegedly posed in the past, it is possible for America to get out of Iraq with only a limited degree of lost prestige. The fact that the Bush administration greatly exaggerated the alleged threat and then broadened the mission to the naive naive neoconservative fantasy of transforming Iraq to a western-style democracy, makes some loss of prestige inevitable. But by again limiting the mission to Iraq to ending whatever threat Saddam may have posed to America, the loss of prestige will also be limited.

Unfortunately though, the Bush administration shows no signs of giving up the naive and impossible neoconservative fantasy of turning Iraq into a western-style democracy and are thus making preparations for an honorable withdrawal. This means at least 2 years (until Bush leaves office in January 2009) more of sacrifice of thousands of american soldiers and hundreds of billions of dollar in the futile endeavor of establishing a system of government incompatible with the strong tribalist and jihadist sentiment prevalent among most Arab Iraqis.

Since it is incompatible with Iraqi culture, the neocon project will continue to fail no matter how many years America stays. The only difference between leaving now and leaving a few years from now is that by leaving now, losses of American lives and taxpayers' money will be limited.

Moreover, an American departure would actually be bad news for both Sunni and Shiite jihadits. The Shiite jihadists currently running Iraq would no longer be able to use American troops as cannon fodder in their war against the Sunnis and would instead be forced to sacrifice themselves to a higher extent. The Sunnis on their hand have no real chance of regaining power with Saddam's army dissolved and with the Shiites greatly outnumbering them and receiving support from fellow Shiite jihadists in Iran.

Friday, December 29, 2006

3 Good Dilbert Strips

Dogbert provides tech support. Opening phrase "This is Dogbert's tech support. How may I abuse you?" gives a good clue of what follows.

The value of elections is explained here.

Here it is explained why it is important to donate blood.

Higher Money Supply Growth-Stronger Currency

The ECB reported that money supply (M3) growth rose to a record high 9,3% in November. The market reaction? The euro rose against the dollar, the yen and the pound.

This mirrors the market reaction to higher than expected U.K. inflation numbers, which lead to a stronger pound.

These reactions may seem strange given the common sense view that a higher supply of a currency will lead to a lower price of it. But this assumes that demand for the currency is unchanged. And as higher money supply growth will likely cause the ECB to raise interest rates more, demand for European securities is likely to rise.

In the long run, we should still expect the currency to fall as the increase in demand for European currencies is not likely to permanently increase as a result of this. But today's foreign exchange markets clearly cause a lot of distortions that means currency value deviate from purchasing power parity even of traded goods.

Wednesday, December 27, 2006

Regulation Weaken New York's Position

New York lost its position as the second most popular place (after London) for initial public offerings (IPOs) in the world to Hong Kong. There are two reasons for this. First, the booming economy of mainland China, whose own stock markets in Shanghai and Shenzen is still not considered as reliable and well-developed as Hong Kong's. Mainland Chinese companies constitute half of the Hong Kong stock market's $1.6 trillion market capitalization and are 73% of IPOs. The other reason is the costly regulations that companies listen in New York have to put up with.

Saturday, December 23, 2006

Honorary Knighthood-For Promoting More of Failed Policy

While a knighthood or honorary knighthoods (for non-citizens of the U.K.) may sound glamorous it should be evident now that it has no relation to actual positive deeds.
Irish singer Bono will now receive honorary knighthood.

Apart from the crappy songs U2 has produced, the reason seems to be that Bono have actively fought for years for increasing foreign aid to Africa (a cause recently joined by Angelina Jolie). In other words, he will receive "honorary knighthood" for promoting increased looting of western tax payers for foreign aid programs that have proved useless in the past.

Perhaps one shouldn't be that suprised that the British Queen choose to reward someone who promotes increased looting of taxpayers. Her livelihood is after all also dependent on the looting of tax payers and the same kind of undeserved prestige that she now shares with Bono.

Friday, December 22, 2006

Current State of the U.S. Economy

Nouriel Roubini have made a fairly good wrap up of this week's economic news (although overall commodity prices have actually been flat during the week).

It seems clear that his earlier prediction of zero Q4 growth will not materialize, for the reason I've explained earlier:namely, that the fall in energy prices have boosted real income and therefore real consumption enough to enable private consumption to expand briskly.

This was confirmed by the personal income and spending report today. Personal consumption was up 4% at an annual rate between July-August and October-November. Even if it is flat in December, it will still be up by 4% for Q4 as a whole too. And as personal consumption is 70% of GDP, that means that it will contribute with a positive 2.8%:points to GDP.

On the other hand, most other components will contribute negatively to GDP. Despite the increase in housing starts in November, residential investments will likely fall again significantly since that increase followed a much more dramatic decline in October and as continued declines in building permits suggest it will fall again in December.

And today's durable goods report suggest business investments is going to be quite weak. While the report's proxy for business investments, shipments of nondefence capital goods shipments excluding aircraft, rose in November, that followed two months of declines. Moreover, December shipments is likely to fall or stagnate as new orders fell again in November.

While the trade deficit fell in October, it is likely to rebound in November judging by the sharp increase in Asian trade surpluses already reported and the fact that oil import volumes was unusually low in October.

Given the fact that inventory build-up for the second quarter in a row was at the highest level since Q2 2004, it seems more likely to fall than to rise.

All told, Q4 growth is likely to be between 1% and 2%, probably closer to 1%. The outlook for 2007 is less certain as it is more in a more distant future, but with the notable anomaly of corporate profits, most indicators suggest a recession. One of these were a report on the shaky state of many mortgages in America, a report which Peter Schiff provided a good analysis of in his latest column.

Thursday, December 21, 2006

Om Michael Treschow och direktörslöner

Det har varit en viss kontrovers på sistonde om direktörslöner. Svensk Näringslivs ordförande Michael Treschow har försvarat de höga direktörslönerna (bland annat med att påpeka att de är lägre än i många andra länder), något som väckt kritik. Men inte bara från det väntade hållet, från vänstern, utan även från Fredrik Reinfeldt och Anders Borg och till och med vissa liberala (eller halvliberala) debattörer, som Dick Erixon (Den avsevärt mer klarsynte Johnny Munkhammar har dock skrivit bra om ämnet). Dick Erixons analyser är ju sällan särskilt klarsynta och är inte det i det här fallet heller.

Jag har tidigare analyserat frågan om direktörslöner och den som vill läsa denna mer djupgående analys av ämnet får följa länken.

Erixons främsta argument är att direktörer är tjänstemän och att de enda som ska få bli rika är de som satsar det egna kapitalet. Han påstår vidare att "Direktörer på storbolag ägnar sig mest åt att skära ner kostnader och betyder ytterst sällan någon skillnad för företagens utveckling. De administrerar en redan etablerad god idé och produktion.". Vilket är ett helt verklighetsfrämmande påstående. Ägarna till stora företag är vanligen fonder och liknande som inte engagerar sig särskilt mycket i bolagets styrning, vilket är vad direktörerna gör. Och som jag tidigare pekat, går denna styrning fel så riskerar företaget att förlora många miljarder. Vilket bidrar till att (kompetenta) direktörers marginalprodukt är vida högre än vanliga anställdas och att även mångmiljonbelopp i löner bara är en liten bråkdel av deras marginalprodukt.

Just det faktum att de inte riskerar investerat kapital gör ju att det inte är orättvist att de inte får ut mer än en mindre del utan att det tillfaller ägarna. Men det, samt det faktum att kompetenta direktörer vanligen har en mycket starkare förhandlingsposition på grund av att de har en mer global arbetsmarknad än vanliga arbetare gör att det verkligen inte går att påstå att direktörer generellt skulle vara överbetalda (däremot är det kanske så i enskilda fall).

Reinfeldts och Borgs kritik kommer förmodligen från en oro att facken ska kräva alltför höga löneökningar om direktörernas ersättningar stiger för mycket. Men det är ett alltför kortsiktigt tänkande. För att undvika sådant krävs istället folkbildning om det faktum att löneutrymmet för alla avgörs av deras marginalprodukt och att direktörers under- eller överbetalning har inget alls med andra arbetares marginalprodukt att göra och är därför inte relevant för deras löneförhandlingar.

Swedish Household Savings Fall Below Zero

Swedish statistical central bureau reports that Swedish household savings fell below zero during the third quarter. Again underlining that growth in Sweden currently has a strong cylical component.

Tuesday, December 19, 2006

Eating Rats

Not that I have a problem with the thought of rats getting eaten-but...isn't that something my favorite animal, cats (I'm a cat owner myself btw), should take care of? Well, in Zimbabwe, due to the food shortages created by Mugabe's policies, people have now increasingly been forced to eat rats themselves.

Sunday, December 17, 2006

Deficit Numbers Significantly Underestimated

Interesting article that points out that had the government used the accounting methods it requires private businesses to follow, the U.S. federal deficit would have been a lot higher ( Many other governments uses the same misleading accounting methods).

Companies report their profits in terms of revenues and costs, that is when earnings and expenses are actually accrued. But the government report its finances in terms of ingoing payments and outgoing payments. Which is relevant in terms of the social security (pension) system which currently receives a lot more ingoing than outgoing payments, but whose real costs are much bigger as it accumulates future social security payment obligations.

Saturday, December 16, 2006

French Rocker Moves to Switzerland to Escape Taxes

From Reuters, via Greg Mankiw,:

"French rocker Johnny Hallyday, one of France's biggest showbusiness stars and a high profile supporter of presidential hopeful Nicolas Sarkozy, said on Thursday he was moving to Switzerland to escape French taxes.

"Like a lot of French people, I'm sick of what they make us pay in taxes," the singer told Europe 1 radio on Thursday, a day after his impending departure for Switzerland was first reported by the weekly L'Express.

"I have made my choice, but I love France," he said. "Even if I live elsewhere, I'm still a French citizen. That shouldn't be forgotten."

As was to be expected, Prime Minister Dominique de Villepien was not pleased:

"Prime Minister Dominique de Villepin on Thursday criticised the famed rocker for moving abroad.

"The idea of leaving France to pay less taxes is not warranted by our country's fiscal situation," Villepin told TF1 television. "All the talents that France has, be they sporting, artistic or industrial, are needed here."

So de Villepien tells him he's wrong to do so, because it is bad for the French government. I really don't think his motives were that altruist or that he was so misguided so as to believe that the best interest of the French government required him to move out of France.

Friday, December 15, 2006

Read the Fine Print of CPI Report

Quite a lot of people seem to have been fooled by today's CPI report, which reported unchanged prices, both with regards to the all-items index and the "core" index. But you can clearly see that there is something strange. Service prices rose 0.3%, which were supposedly cancelled out by a 0.4% decline in commodity prices.

But how could there be a commodity price deflation in the CPI while commodity price indexes show sharp increases? The Economist's commodity price index for example show a 30% increase over the latest year.

This inconsistency, to be sure, is mostly due to the fact that what the CPI report labels "commodities" is finished goods, whereas the commodity price indexes track prices of raw materials. But it is also due to the fact that the Bureau of Labor Statistics uses arbitrary measures of "hedonic adjustments". More specifically, the primary reason why goods prices fell so much was that the introduction of 2007 car models (which the BLS statisticians on unspecified grounds have deemed to be of much higher quality) continued this month.

CPI reports during coming months will apparently also be depressed by this arbitrary "hedonic adjustment". This will likely fool most people that "inflation is low". But the truth is very different.

Thursday, December 14, 2006

Typical Government "Solution" to Problem

As the ultimate result of the massive inflation created by Alan Greenspan, a penny coin now costs more to manufacture than the one cent it is denominated in, as I reported several months ago. This of course opens up the opportunity for astute entrepreneurs to melt down the copper it is made of and sell it to the higher world market price of copper.

What is the U.S. government response to this situation. To stop inflating? Mwahhahhaha! To admit that previous inflating have made the penny useless and do away with the penny? No way, apparently.

Instead, this problem is to be met with the distinctly governmental way of dealing with problems: with coercion, regulation and intimidation. The U.S. government will now forbid the melting down or export of pennies.

2 goda nyheter

Apoteksmonopolet ska avskaffas och centern överger försvar av TV-"licens". Nu är det bara Kd bland de borgerliga som håller fast vid det. Tyvärr så lär även det nya systemet innebära skattefinansiering, men det innebär ändå en marginell förbättring eftersom Radiotjänst kan skrotas.

Wednesday, December 13, 2006

China Surpasses EU -and Canada- as US Goods Supplier

The U.S. trade deficit for October posted another sharp decline in October. If you look at the details, you can see that almost the entire decline is related to falling costs of imported oil. In part, this is related to falling prices, but the volume of oil imports also appears to have fallen. As there is really no reason to expect a permanent decline in oil demand, we should expect import volumes to turn up again in the coming months.

Meanwhile, one little noticed development recorded in the report is that Chinese exports to the U.S. have overtaken both total exports of the EU and the total exports of the country that traditionally have been the biggest goods supplier to the U.S., Canada. Chinese exports in October totalled $29.3 billion, versus $28.3 billion from the EU and $25.4 billion from Canada. Japan, the great boogey man of the 1980s and early 1990s, exports only $13.7 billion, less than half of what China exports.

While this in part reflects the undervaluation of the yuan, it is most importantly a result of the enormous increase in productive capacity in China.

While Chinese exports to the U.S. rose 20% from a year before, Canadian exports to the U.S. was actually lower than in October 2005, most likely reflecting the aforementioned decline in U.S. oil imports.

Tuesday, December 12, 2006

U.K. Price Inflation Reaches New High

U.K. consumer price inflation according to the EU-harmonized definition rose to 2.7% in November from 2.4% in October, the highest ever during the EU-harmonized index have been in place in Britain (i.e. since January 1997). Another index, the Retail Price index showed even higher inflation (3.9%).

Ironically, this increse in domestic price inflation in Britain (i.e. the erosion of the pound's domestic purchasing power) could at least in the short term increase its external purchasing power. The reason is that foreign exchange rates today are in the short term mainly determined by movements in nominal interest rates. And as inflation is now far above the Bank of England's targets, this makes further interest rate increases increasingly likely. And indeed, so was the case today as the pound surged against both the euro and the dollar.

Incidentally, Swedish price inflation also accelerated, although it is still below the Riksbank's 2% target. But as excessive Swedish money supply growth causes other imbalances, more interest rate hikes will be needed in Sweden too.

Monday, December 11, 2006

Bears, Bulls, Hawks and Doves in Economics and Finance

When I write about the U.S. economy, I often use expressions like "bearish" and "bullish" . Somewhat less frequently, I also use the expressions "hawkish" and "doveish". These are common terms in economics and finance and I personally like these expressions (which is why I use them), but perhaps not all of my readers understand them. To clarify, these words do in fact refer to four animals: bears, bulls, hawks and doves.

The disticntion between "bulls" and "bears" refers to whether you are optimistic or pessimistic about a particular economy or market, or in other words if you think it will go up or down. When bulls attack you, perhaps because you're wearing something red they attack you butting you with their horns upwards. By contrast, when a bear attacks you, perhaps because it is a mother thinking you're gonna attack her kids or because it is hungry and thinks "dinner is served" when looking upon you or because it thinks you're invading its turf, it smacks you down with its powerful paws. Therefore, "bulls" are the people who thinks an economy or market is headed up, whereas "bears" are the people who thinks an economy or market is headed down.

"Hawks" and "doves" are also used to describe different sides of war debates, but in the context of economics it refers to the attitude towards inflation. "Hawks" want a tough stance against inflation, whereas "doves" wants more of it. Whether you're a "hawk" on "dove" in a particular situation depends on two things: first how inflationary you consider the current environment to be and secondly how much inflation would be ideal for the economy.

Sometimes it is assumed that "bears" and "hawks" are necessarily the same, and that similarly "bulls" and "doves" are also the same. But that is quite often not the case. There are plenty of examples of "doveish bears" and "hawkish bulls".

Examples of "hawkish bears" include me and Peter Schiff. Examples of "doveish bears" include Paul Kasriel, Paul Krugman and to some extent also Nouriel Roubini. Exampels of "hawkish bulls" include supply-siders like Donald Luskin and Michael Darda. "Doveish bulls" include other supply-siders like Larry Kudlow, Jerry Bowyer and to some extent also Alan Reynolds.

It struck me that virtually all "bulls" on the U.S. economy today are supply-siders. There is a split between those like Luskin and Darda who think Fed policy is too loose and those like Kudlow and Bowyer who thinks it is too tight, but they all agree that the U.S. economic future is bright even in the short-term. This reflects their naive belief that the rather modest Bush tax cuts will permanently and significantly raise U.S. economic growth, even though they aren't matched with spending cuts.

"Bears" are generally Austrian or semi-Austrian analysts who see a downturn inevitable because of the imbalances created by Alan Greenspan. Some , like Paul Krugman, are however partisan Democrats who are bearish because they long to blame the future recession on Bush ( Although to be fair to Krugman, he have occassionally conceded that Greenspan might be the main culprit).

Aftonbladets kuggfråga

Aftonbladet meddelar att regeringen inte kommer ha något absolut mål om jämn könsfördelning bland statliga toppchefer även om det antyds att det ändå ska vara en faktor som eftersträvas. Varpå Aftonbladet har en webbfråga om "blir det färre kvinnliga chefer nu?". Men det är ju värsta kuggfrågan. Självfallet blir det färre kvinnor om man är helt könsneutral än om man utöver de kvinnor som väljs in på kompetens därutöver direkt väljer en del kvinnor just för att de är kvinnor. Den relevanta frågan är "hade det varit rätt att för den jämna könsfördelningens heliga ko välja bort kompetenta medlemmar av ett kön till förmån för mindre kompetenta medlemmar av det andra könet?".

Sunday, December 10, 2006

Data Indicate No U.S. Recesssion-Yet

Unlike last week's fairly consistently bearish economic news, this week's data were relatively bullish. The ISM service index rose, employment growth was positive. Jobless claims was a bit more mixed with initial claims falling while continuing claims rising , while consumer sentiment fell.

What this is indicating is that while the construction sector is in a recession, and the manufacturing sector on the verge of a recession, the service sector and the mining sector is still growing. This was confirmed by the sector specific details of the employment report which showed shrinking employment in construction and manufacturing and increasing employment in services and mining.

This indicates Nouriel Roubini's forecast for 0% growth in the fourth quarter is a bit too bearish. Growth will probably end up a lot lower than the 2.2% current third quarter estimates, but it will be a bit higher than zero. The main reason why growth have stayed above zero despite the housing bust is that lower energy prices have boosted consumer purchasing power (so much for the idea that price deflation is necessarily bad for the economy) enough to offset much of the negative impact of the housing bust. All of this is in line with my analysis from late October.

For 2007, the case is much stronger for Roubini's recession call. Oil prices have now started to stabilize and indeed recover somewhat from their lows (at least in dollars ) and will provide no further support for the economy henceforth. While the falling dollar should boost U.S. exports, the dollar fall have been too small in trade weighted terms and the export sector play a too small role in the economy to provide a significant boost to the overall economy.

Meanwhile, the housing bust should continue as construction spending is still way above the historical average and as housing equity continues to erode. Which brings ut to the latest flow of funds report. While the increase in household debt was actually somewhat lower than I had expected, this probably reflects that the sharp increase in bank ledning in the week between September 27 and October 4 was attributed to the fourth quarter, which means that the debt increase then will be much higher. Even so, household debt relative to disposable income rose during the third quarter to a record 130.4%, up from 129.4% in the previous quarter.
Meanwhile, housing equity fell to a record low of 53.6%.

This means that construction spending will continue to contract, while the room for further home equity withdrawals will be limited, which in turn will limit consumer spending.

The one thing remaining to support the U.S. economy is business investments. One of the factors determining it, corporate profits reached a new record high during the third quarter, something which creates a case for believing in continued boom in business investments. However, while corporate profits are an important factor for predicting business investments, it is not the only one. What matters to business decisions to invest is not current profits per se, but expected future profits from further investments. If companies expect future profits to fall, then the current high level of profits will only have a limited effect in increasing business investments.

The last factor, the high level of business profits and the support it is likely to give to business investments is the strongest argument against the bearish case and makes it impossible to declare a 2007 recession a certainty. But, as all other indicators support that case, its likelyhood is over 50%

Saturday, December 09, 2006

New Study on Trade Effects of Monetary Unification

Johnny Munkhammar reports about a new study by two Swedish economists (written in Swedish), Harry Flam and Håkan Nordström, on the effects of the European Monetary Union on trade. And they found that the introduction of the euro have boosted trade within the euro-zone by 13-14% between 1998 and 2005. A number they have come up with by first comparing how much intra-euro zone trade increased with the increase in trade with 10 OECD countries (Denmark, Sweden, Norway, Britain, Switzerland, the United States, Canada, Australia, New Zealand and Japan) in a control group. Then they compared the increase in trade between the euro zone and the control group with the increase in trade between the 10 countries in the control group. And then finally, they tried to adjust for the effects of different other factors that should influence the level of trade, such as economic growth, inflation, nominal exchange rates etc.

Their conclusion was further supported by the fact trade increased particularly much for the kind of input goods expected to increase in trade particularly much if the euro stimulated so-called vertical specialization i.e. the specialization of different stages of production over national borders.

Their methodology seem to be basically sound, but there are actually two reasons for believing they've underestimated the positive effect. First of all, they've statistically accounted for differences in economic growth. While that is basically valid as economic growth do influence trade and is mostly caused by factors unrelated to monetary unification. But if trade have really increased then that would raise economic growth. And secondly, the 13-14% number was the difference between the increase in intra euro zone trade and the increase in trade between euro zone countries and the control group. But as statistically adjusted trade between euro zone countries and the control group have increased a lot more than trade between countries in the control group, then there is reason to believe the euro have stimulated trade there too, which also means the boost to intra euro zone trade is larger.

One should always of course take results like this with a grain of salt. Statistically adjustments for the effects of other factors is likely to be inprecise and incomplete and so this result could very well be wrong with a number of percentage points. And as always, this result need not be applicable on other countries in other historical eras as there are no quantitative economic laws. However, for reasons explained above, the results are more likely to err on the downside than on the upside.

The authors end with a final qualification, namely that their study only takes on the issue of the effects of the monetary union on trade, and does not consider the effects of different monetary policies inside and outside the monetary union. A very valid qualification. In a world with a global gold standard, there is no question that a global monetary union would be the optimal monetary order. However, now that the world relies on fiat money, the issue gets more complicated. A monetary union is superior in any case compared to fixed exchange rates as it removes transaction costs. A monetary union is also superior to floating exchange rates provided that the monetary policy in the monetary union is better, equally bad or marginally worse than what would have been the case with an independent monetary policy. It would however be beneficial for a country to opt out of a monetary union if the independent monetary policy would be considerably better ( i.e. less inflationary) than that of the monetary union. In the case of Sweden, monetary policy outside the euro zone have not proven to be less inflationary.

Friday, December 08, 2006

This News Item Could Create New Stereotypes.....

The Issue of Over- And Malinvestment in China

China have for the last quarter century or so been the world's most successfull economy, with average annual growth of about 10% per year. As a result its economic might have increased.

The main driving force behind the high growth rate is the high investment rate, which in turn is driven by its high savings rate which in turn is a result of China's lack of a welfare state.

Frequently though, the issue is raised if not the Chinese investment boom is a false boom, an "Austrian"-style credit-driven over/malinvestments boom that is going to end in a bust.

The answer is that while there are indeed quite a lot of malinvestments in China, that does not mean that there will an economy-wide bust.

While the Chinese save quite a lot, their financial markets are still relatively underdeveloped, which is why large Chinese firms usually are listed in Hong Kong rather than Shanghai or Shenzen. That also means that all of this savings go through the banking system. And with China of course having fractional reserve banking, this will fuel significant monetary inflation. Moreover, much of the loans are often issued to people connected to local government officials with investment projects of questionable value.

This means that a significant portion of investments in China is really malinvestments. Moreover, a lot of savings is also squandered through in the build-up of massive foreign exchange reserves to keep the yuan from rising faster. As significant yuan appreciation is really inevitable, much of this will be lost in exchange rate losses.

But this will only mean that growth in China while being high on a absolute level will be lower than it could have been had its financial institutions been sounder. Or in other words that aggregate statistics hide a combination of increased production due to sound investments and malinvestments that will be dead ends.

But for an aggregate bust to occurr, we must have monetary growth well in excess of what is sustainable. Which is what would be required for People's Bank of China to significantly rein in credit growth.

Yet while money- and credit growth seem high on an absolute level, they are not really that high relative to China's super-high structural growth rate. As The Economist recently pointed out, credit growth in China is not that much higher than nominal income growth. And asset prices have in fact increased slower than income growth.

That means that that there is only a limited potential of the kind of acceleration in consumer price inflation that would force the central bank to the kind of dramatic tightening of monetary policy that could trigger a recession. And in sharp contrast to the South East Asian economies before the Asia crisis in 1997-98, China have a large current account surplus and is therefore not dependent on foreign credit whose nominal value could swell if the domestic currency collapses.

Thus, I am not worried about China suffering the fate of Thailand, Indonesia, Malaysia and South Korea in 1997. While the Chinese banking system generates quite a lot of malinvestments, there are enough sound investments to sustain continued high growth.

Thursday, December 07, 2006

Religious Fundamentalism in Action

In Israel, ultra-Ortodox Jews demand that the Israeli airline El Al stop flying on the Jewish sabbath, or else face a boycott. El Al have no regular flights during the sabbath, but during a few occasions they have made flights for passengers whose regular flights just before the sabbath was delayed.

The ultra-Orthodox now demand a legally binding pledge that in the future, these passengers should be stranded during the entire sabbath in the event of any future delays. That makes absolutely no sense at all of course, but it is what religious dogma require.

The jihadist however, are apparently adament that they should top fundamentalists from other religions in evil. In the Somali town of Bulo Burto, the chairman of the Islamic court says that anyone who fails to pray 5 times or who are found not praying during the designated time, will be beheaded.

Iraqi Stagflation

While this may be a small problem compared to the much bigger problem of both Sunni and Shiite jihadist thugs slaughtering the other side's civilians by an average of over 100 per day, Jeffrey Tucker points out that Iraq's monetary policy is disastrous too. As a result, price inflation is 50% while estimates of unemployment range from 20% to 60%.

Still, that is not fully as bad as in Zimbabwe, where, as I told you last year, inflation was 500% ( it has since risen to over 1,200%) and unemployment 60% to 75%.

Wednesday, December 06, 2006

Bakvänd "Logik"

Johan Norberg har fått en förklaring varför Sveriges Radio använder det negativt klingande ordet "ex-diktator" för Pinochet medan de benämnar Castro med den mer neutrala termen ledare/president:

"Hej igen Johan, du har absolut en poäng - jag tror att det finns en tendens att kalla nu verkande presidenter/ledare/envåldshärskare för sitt ämbetsnamn dvs t ex president. Så länge de sitter vid makten är de ju de facto ledare och ofta dessutom presidenter, även om vi som du ser varierar ordvalet med ´enväldig ledare´ etc.

Jämför med exemplet Saddam Hussein, som vi kallade för ´Iraks president´ medan han fortfarande var innehavare av presidentposten. Nu benämns han däremot i sändningarna som ´Iraks ex-diktator´ eller ´forne diktator´. Diktatorn Robert Mugabe kallas också i sändningarna för ´Zimbabwes president´."

Som Norberg konstaterar så får vi då förutsätta att Castro kommer att benämnas "diktator" så fort han dör (vilket förhoppningsvis och troligtvis sker ganska snart).

Förvisso är det, om det nu är en princip, åtminstonde en formellt neutral princip. Men det är inte en vettig princip. Något skäl för att ha den anges inte. Och det innebär ju faktiskt att Pinochet straffas för att han frivilligt gav upp makten och Castro belönas för att han hållit sig fast vid makten (inte för att jag tror någondera bryr sig om hur de benämns i Sverige, men det är ändå anmärkningsvärt att en diktator ska behandlas sämre för att de upplöser sin diktatur).

Rather Impudent After Lithuania Rejection

Next year, Slovenia will be the 13th EU country that will formally be part of the Euro zone. In addition to that, there are a number of smaller European countries which have unilaterally started to use the euro as currency, like Andorra, Monaco, San Marino, Montenegro and Kosovo. Also, Denmark and all Eastern European EU states except Poland, the Czech Republic and Hungary have pegged their currencies to the euro, which in effect forces them to follow the monetary policy of the ECB.

Yet that leaves 12 EU countries that do not use the euro, of which only two (Britain and Denmark) have an opt-out that permits them to continue to do so. Now the EU Commission and the ECB will issue a report which criticizes the remaining 10 states for not doing enough to meet the criteria for joining the euro.

But while it is obvious that Sweden is dragging its feets for purely political reasons (the no-vote in the 2003 referendum) and while particularly Hungary have pursued extremely irresponsible fiscal ( with a budget deficit of 10% of GDP) and monetary policies, it is quite impudent for the EU Commission to criticize Lithuania and the other Baltic states, after rejecting Lithuania on extremely flimsy and invalid grounds earlier this year.

As I explained at the time, the reason why the Baltic states have so high inflation is because they have extremely high economic growth and fixed exchange rates versus the euro. Because high economic growth drives up land prices and wages in the non-tradable sectors of the economy, high economic growth will inevitably raise the real exchange rate. This can be achieved either by a higher nominal exchange rate or by higher price inflation. Yet the EU Commission demands the for the Baltic states impossible combination of fixed exchange rates and a moderate consumer price inflation rate.

The only way the Baltics could lower their inflation rate while keeping a fixed exchange rate would be to either wreck their economies through statist policies or to start adopting the kind of currency market interventions used by China and some other countries, where the central bank accumulates massive foreign reserves which are later "sterilized" to limit domestic price inflation. The first alternative would be bad for quite obvious reasons, the second would probably not be permitted by the EU.

For reasons that I explained earlier, admitting the Baltic states would certainly be in the best interest of both the Baltic states and the existing euro zone members. I suspect that the real reason why the EU have suddenly started care about the formal rules (which they have ignored in the past, for example with regard to the excessive budget deficits in Germany and France) is that with their higher growth and higher inflation, admitting the Baltics would raise both aggregate Euro-zone growth and aggregate Euro-zone inflation. That in turn would force the ECB to pursue a less inflationary monetary policy, which I think would be a good thing, but which most politicians think is a bad thing.

Tuesday, December 05, 2006

Hollywood And Economics

Thomas Sowell have a good column where he notes that people in Hollywood are usually economically ignorant. He uses a good example of a recent movie where Starbucks is attacked for buying coffee beans from poverty stricken Ethiopian farmers. But as Sowell points out, these farmers would have been far worse hadn't Starbucks bought their beans.

And since the root cause of their low income is low productivity, the suggestion from some leftists that we should force them to have minimum wages at western levels or else refuse to trade with them ("fair trade") would simply make all of them unemployed.

It is interesting and very appropriate that Townhall uses a picture of Angelina Jolie to illustrate economic ignorance in Hollywood since she have been the most active spreader of economic fallacies lately. Apart from giving away a lot of her own money (which I don't mind if she does as it is her money, but it isn't the solution to world poverty), she has been actively lobbied both for an expanded welfare state at home and sharp increases in foreign aid. She have actively spread the myth that the West is responsible for third world poverty and that aid is the way to solve it.

That would be bad enough, regardless of which Hollywood personality spread it, but what is really bizarre is that someone with such a confused altruist and socialist outlook also claimed to support Ayn Rand and is reportedly going to play Dagny Taggart in the coming Atlas Shrugged movie.

Apparently, Jolie seem to have the same relationship to Rand's ideas as Alan Greenspan. Having her playing Dagny Taggart is about as appropriate as having central bank foe Andrew Jackson depicted on the twenty dollar bills printed by the current central bank in the United States.

Here is btw a funny Dilbert cartoon satirizing Jolie's preference for adopting children from the third world.

Hong Kong Will Not Impose Sales Tax

In late July, I reported on news I read about in two columns, that the world's freest economy, Hong Kong planned to impose a consumption tax.

Fortunately, I now see that the Hong Kong government was forced to drop the idea after strong public opposition. Critics pointed out that it would hurt the economy, and reduce tourism. The Hong Kong finance minister Henry Tang still seems determined to "broaden the tax base", i.e. raise taxes for people with low and average income, but I have a feeling that attempts to apply income tax (Today only 35% of workers pay any income tax at all, and the top income tax is just 16%) on the under- and middle class will be as unpopular as the sales tax.

Tang displayed an amazing level of cluelessness when he said "Although the public understands that GST [General Sales Tax] can broaden our tax base, it is clear from the views collected that we have not been able to convince the majority to accept GST as the main option to address the tax base problem.". Tang don't seem to understand that the reason why a majority of the public in Hong Kong opposed the sales tax was precisely because it would "broaden the tax base", i.e. raise taxes for that majority.

Monday, December 04, 2006

Note About Comments

I have been for some time been wondering how come I haven't seen any comments here for the last year or so. Not that it is that important for me per se to receive it, but I still felt it was kind of strange. Particularly since I received quite a few comments during the first few months of this blog, when I had a lot fewer visitors. I now embarrasingly enough discovered that the reason was that I had accidentally put in comment moderation without noticing it or intending it. I now discovered there are hundreds of comments waiting for my approval.

Considering that most of it seems to be pure junk (link to pornographic web sites or other links irrelevant for the subject), I think I will keep comment moderation in place. Comments that add value to this blog ( And yes, that certainly includes intelligent criticism of my positions) is something that I will allow and indeed welcome. I will however not allow any "comments" that is simply advertisments for pornography sites or car insurances sites or similarly irrelevant sites . Nor will I allow any rude personal insults.

To the many whose worthy comments were left unpublished during the latest year, I truly apologize. Your comments have now been published, though I do not have time to retroactively reply to all of them.

Sunday, December 03, 2006

Will the Falling Dollar Help or Hurt the U.S. Economy?

In January, I predicted that the U.S. dollar would fall during 2006. As you all presumably know, I have been proven right on that (although it turned out that the Japanese yen rather than the U.K. pound would be the mayor currency which would be as weak as the dollar).

But is this development good for the U.S. economy? In the long run, the answer is an almost unqualified "yes", as it will reduce the imbalances of the U.S. economy. While I would have prefered a "tighter" fiscal and monetary policy to solve ths, a dollar depreciation is the second best solution (especially since as we shall see, it will likely force the Fed to pursue a less inflationary monetary policy).

With regards to the short term effects, however, the situation is much more complicated.

On the one hand, the falling dollar will of course increase U.S. exports and reduce the U.S. trade deficit (both because of increased exports and reduced imports). Something which in turn will of course boost economic growth.

Moreover, a falling dollar will increase the dollar value of foreign assets held by U.S. citizens and corporations (while leaving the dollar value of U.S. assets held by foreigners unchanged) and so help improve their balance sheets. Similarly, the falling dollar will increase the dollar value of the investment income of U.S. citizens and corporations from their foreign interest income/dividends/profits. This will help strengthen the U.S. factor income balance.

However, there will also be negative effects for America. This means mainly that the dollar decline will raise price inflation, which will have negative effects for two reasons. First because it will likely worsen America's terms of trade, and second because it will force the Fed to pursue a "tighter" monetary policy (while I again thinks this is good in the long run, the short-term effects of that is negative)

Why will it worsen America's terms of trade? Well, simply because currency movements have a much greater effect on commodity prices than the price of finished products and because America is a net importer of commodities.

For various reasons, the prices of finished products are relatively rigid. As you may have noted when you visit stores, prices usually don't fluctuate very much on a day to day basis or even on a monthly or even annual basis. And when they change, they usually don't change particularly much.

By contrast, prices on things traded on global financial markets, like commodities, fluctuate quite a bit, even within just a day and they often change dramatically from year to year.

While commodities are traded in dollars on global financial markets, it is still highly relevant what the euro or yen or pound or yuan price of a commodity is. Most
demand for commodities does after all come from outside the United States. So the commodity price in other currencies is the most relevant thing to consider. That means that a dollar decline will more or less automatically raise the dollar price of commodities, as the euro/yen/pound/yuan commodity price falls.

But as finished product prices are a lot more rigid, a dollar decline will more or less automatically produce a terms of trade gain for commodity exporters and a terms of trade loss for commodity importers like America.

Despite its abundant natural resources, America is a net importer of commodities, simply because America have such a large population and large economy, that its consumption of commodities exceed its production. Most of the net commodity imports is related to oil.

Because of this, the terms of trade of America (and other commodity importers) will worsen as a result of the dollar decline.

It should also be mentioned that as Brad Setser points out, the overall dollar decline haven't really been as dramatic as many people think on the basis of the decline in the value of the dollar against the euro and other european currencies, including the many countries that peg their currencies to the euro (meaning Denmark plus most Eastern European countries), but also for example the U.K. pound, the Swiss franc and the Swedish krona. But the fact is that most of America's trade is with non-European countries, limiting both the negative and positive effects of the dollar decline. The currencies of other important trading partners, most notably the Chinese yuan, the Japanese yen, the Canadian dollar and the Mexican peso have stayed basically unchanged or risen only slightly against the U.S. dollar.

Apart from the fact that this means that both the positive and negative effects of is the dollar decline is smaller than one would think by looking at the exchange rate of the dollar against European currencies, the relevance of this is that it will relatively boost the signifance of the for the American economy negative aspects of the dollar decline.

Why? Well, because while the effect on the trade balance and finished product prices is related to the trade weighted value of the dollar, the effect on commodity pruces is related to the global economic strength. And Europe have a much larger share of global GDP than its share of America's foreign trade. This will enhance the relative importance of the terms of trade decline for America, while reducing the relative importance of the positive effects on the trade balance (and the increase of the price of imported finished goods).

Because of the higher commodity prices, and also because the dollar decline will put a upward pressure even on finished import product prices (although that effect for aforementioned reasons is likely to be less dramatic.), consumer price inflation will all other things being equal be increased in America by the dollar decline.

Higher inflation will in turn make it a lot more difficult for the Fed to cut interest rates in response to the looming recession.

In conclusion, while the net effects on short-term economic growth prospects in America is likely to be small as there are opposing forces cancelling each other out to a large extent, it is at least ( probably more) as likely to be slightly negative than slightly positive.

Saturday, December 02, 2006

It IS That Bad in Swedish Government Television

Imagine if the government television channel in some country dedicated 4 hours to celebrate uncritically former Chilean dictator Augusto Pinochet. There would of course be massive condemnation of this and people would certainly consider any claims of neutrality laughable. Such a uncritical celebration of Pinochet would probably never happen as most libertarians and conservatives deplore Pinochet's murder and torture of communist dissidents.

Yet here in Sweden, the government television channel (who has the nerve to -in true Orwellian fashion- characterize itself as "free television") have a 4 hour special theme night to celebrate ( they themselves use the Swedish word "fira", which means celebrate) Fidel Castro and his long rule as dictator of Cuba.

First they are going to have a re-run of an uncritical interview with Castro, more than an hour long, produced by Swedish government television 30 years ago. Then they will have a panel discussion about him from 3 well-known admirers of Castro. Then they will have a Oliver Stone "documentary" where Castro will again be able to present his views. Then they will finish with an interview of Castro's former mistress.

A pure communist propaganda night, in other words. One shouldn't perhaps be too suprised that a government television channel is attracted to Castro's socialist vision. One should however be outraged that the new Swedish centre-right government doesn't immediately end the financing of the government television channel through the special tax called "TV license".

Note however, that I am not trying to establish some kind of moral equivalence between Pinochet and Castro. After all, Castro have killed a lot more people, Castro have destroyed Cuba's economy while Pinochet saved Chile's economy and transformed it into Latin America's most successful and unlike Castro, Pinochet voluntarily relinquished power.

Friday, December 01, 2006

It's Not That Bad In Sweden

As usual, when he discusses non-monetary issues, Alan Reynolds latest column was good and interesting.

Except that -with the risk of being regarded as nitpicky- he overestimated just how bad (i.e. socialist) things are in Sweden. He claims, quote:

"Ordinary Swedish workers face a payroll tax of 40 percent, a national and local income tax of at least 50 percent in Stockholm (the rich pay 5 percent more) and a 35 percent value-added tax on everything they buy."

Actually, the payroll tax is "merely" 33%, the general value added tax is "merely" 25% (It is lower on some items like food and news papers, but higher on alcohol, tobacco and gasoline). The marginal income tax for most workers is actually just 31.5% (differes between different Swedish municipalities, generally somewhat lower than that in the Stockholm area and some Southern Swedish areas, but higher in northern Sweden. Workers earning above-average income also pay a 20% extra tax to the central government in Sweden . And workers which is considered particularly well-off, they pay an additional 5% of their income).

While is indeed far too socialist (social democratic), it's not really as bad as Alan Reynold's claim it is.

Numbers That Speaks For Themselves

While the third quarter GDP data were slightly bullish, they refered to the third quarter. The numbers for the fourth quarter that have come out in recent days have had a very different tone. I'll wait for the many vital data coming out next week, most importantly the non-manufacturing ISM, the employment report and the flow of funds report, before I give a more extensive analysis of the current state of the U.S. economy. For now, I'll just let the numbers speak for themselves:

Durable goods orders plummet while consumer confidence falls.

Wal Mart and other U.S. retailers report disappointing sales.

Initial jobless claims soar, and continuing claims rises too.

Home prices increasing at slowest rate in 8 years.

U.S. construction spending continues to decline rapidly.

ISM Manufacturing index shows contraction for the first times since April 2003.