Turkey's Inflationary Boom

While both its western (Greece) and southern (Syria) neighbors suffers from various kinds of serious problems, Turkey is seemingly at "the top of the world" right now with increasing influence and a very strong economic boom.

Economic growth was an impressive 11% in Turkey during the first quarter.

However, this boom is largely based on an unsustainable 31% increase in money supply. The symptoms of this inflationary boom is not only high growth but also high price inflation and a sharp increase in the current account deficit to more than 10% of GDP.

The fact that the central bank of Turkey is, pathetically enough, in denial about this by claiming that "aggregate demand conditions do not indicate an overheating" means that the boom will probably go on for a while longer-but that the bust will become even deeper when it inevitably come.

Fed Governor Argues That The Fed Has Reduced Growth

No, she didn't put it that way. But that is in effect what Fed Governor Sarah Bloom Raskin said when she said that high economic inequality reduces growth given the fact that Fed "quantitative easing" has increased economic inequality.

Belarus Suffer Financial Crisis From Monetary Union-Or Wait...

To illustrate the point I made about how the existence of an independent currency does not necessarily prevent payment crisis, Belarus (who recently devalued its currency by 36%) will now have its electricity supplies from Russia cut off because of its failure to pay its electricty bills.

Why Quantitative Easing Hasn't Caused HyperInflation

Some readers have asked me what I think of Robert Higgs post about why the large increase in the Fed balance sheet hasn't caused hyperinflation. 

I think that most of the arguments that Higgs made are correct. The most important factor is that the increase in the monetary base hasn't increased money supply very much. And the monetary base is irrelevant for price inflation except to the extent it changes money supply.

There are several reasons why it has had only a limited effect on money supply, including the two that Higgs mentions, that interest that the Fed pays on bank reserves now unlike before (that interest payment BTW makes no sense at all given the Fed's pro-inflationary policies otherwise, unless you assume that the Fed's purpose is to maximize bank profits), and the fact that banks are more reluctant to lend. Another factor that Higg didn't mention is that households and companies are probably also more reluctant to borrow.

Another factor that Higgs overlooks is that the reduction in real interest rates has increased money demand, and as higher money demand has a similar effect as a lower money supply, this has limited the effect of the money supply increase that has in fact taken place.

I disagree with Higgs that it will inevitably lead to hyperinflation or even greatly accelerating rate of price inflation. It would eventually, if the Fed didn't reverse their asset purchases once banks becomes less reluctant to lend and households and companies becomes less reluctant to borrow, but since that would likely be associated with a real recovery as well as higher price inflation, the Fed will be able and likely to reverse them at that point.

Slower Growth, Not Higher Productivity, Behind Weaker Labor Market

In a post a few days ago, I argued against the "technological" explanation for high unemployment in America.

One way of testing this is by looking at productivity. If productivity growth increased, then it could be argued that it is at least a partial explanation. If not, then it would not seem applicable.

And the numbers suggests that this is not an applicable explanation. Total average annual economy wide productivity growth* fell from 1.95% between 1991 and 2000 to 1.5% between 2001 and 2010.The reason why employment growth still fell from 1.4% in the 1990s to 0.15% in the 2000s was instead that growth fell from 3.4% to 1.7%.

*=Calculated by dividing GDP by the number of employed according to the household survey. This is not to be confused with the official "productivity" numbers separately released that only covers a limited part of the economy. 

German Real Wages Rises

Though the current unemployment rate in Germany at 6.1% is still not low in an absolute sense (There are countries with 3% unemployment rates), it is low by historical German standards and compared to most advanced economis. As a result, worker's bargaining power is improving, especially in the sectors where there is a shortage of worker.

Because of that, and because of rising productivity, real wages in Germany are rising faster than in most other countries, up by 2% in the latest year. By contrast, real wages have dropped in for example Britain (where they were down by as much as 2.6%) and America  .

There are no sectoral sub-division in the statistics, but probably and hopefully, real wages are rising particularly much in sectors with shortages of workers while not rising so much or at all in sectors with continued high unemployment. If so, the increase in real wages will be good not just because higher real wages is a self-end, but also because it will increase employment.

Statistical Notes Thursday June 23

-The British budget deficit (net borrowing) rose from  £25.9 billion in April-May 2010 to £27.4 billion in April-May 2011 despite higher revenues from the increase in VAT, suggesting a very weak underlying economy.

-Initial jobless claims rose in the U.S., indicating a very weak labor market.

-Euro area PMI fell from 55.8 to 53.6 in June, suggesting further deceleration of economic growth in the euro area.

-Good and bad news from Ireland. The good news is that the current account balance strengthened further, so that Ireland now has a surplus during the latest year of €1.2 billion, nearly 1% of GNP.  During the height of its housing bubble in 2007, it had a deficit of more than €10 billion, or more than 6% of GNP.

The bad news is that GNP fell as much as 4.3% from the previous quarter. Considering how fast growth was in the preceding quarters, this probably however at least partially reflects seasonal adjustment problems.

-The number of employed persons rose by 2.3% in Sweden in May , while the number of hours worked increased as much as 3.5%.  Unemployment is however still high at 7.9%.

-Consumer price inflation rose to a new high of 5.2% in May in Hong Kong. With the Hong Kong dollar pegged to the U.S. dollar while the yuan gradually appreciates, high inflation is likely to continue in Hong Kong.

A consolation for workers in Hong Kong is that average nominal earnings rose as much as 7.2% in March.

-Employment in Taiwan rose another 0.2% in May compared to the previous month and 2% compared to May 2010. helping to push down unemployment to 4.27%, the lowest since 2008.

-Unemployment in Israel fell to 5.8% in April, below the lowest level of 2008 (5.9%) and significantly down from the 7.7% high of 2009.

Working Hours Irrelevant For Greek Issue

I got unusually many comments and other reactions, both negative and positive, from my post on Greece the other day, where I pointed out that the Greek protestors are extremely irrational as no alternative exists to some form of austerity measures in Greece and that Greece as a nation has been living beyond its means in an unsustainable way, or in other words have tried to live at the expense of others, as is evidenced by its persistent and very large budget and current account deficits.

I see now in various posts and articles, that proponents of the view that Greeks aren't living at the expense of others have been pointing out that Greeks on average work longer than people of any other nation in the OECD, except South Korea. That is true, but also irrelevant.
 
Because the relevant issue in a debt crisis isn't how much someone produces, and much less how many hours it takes for the average worker to produce what they produce, it is instead how much they spend relative to how much they produce.  And the bottom line is that Greece has had persistent and large deficits in both its government budget and current account balance, despite being one of the largest net recipients of money from the EU budget.

The Greeks that are employed may work longer than others in the EU, and per capita consumption is below the EU average, but because the Greek employment rate and the productivity level is so low, this still means that Greece is producing a lot less than it spends.

As the rest of the world won't continue to tolerate this for much longer, the only real question is if the reduction in Greek deficit spending is done in the least painful way or the most painful way for Greece. The Greek protestors are because of their cluelessness in effect opting for the most painful way.

Technology Not The Correct Explanation For High U.S. Unemployment

When trying to explain the weak employment numbers in the United States, Obama argued that technology was at fault, using as an example the fact that we usually withdraw cash from ATM's rather than from bank tellers these days.

The "technological" excuse for his poor performance on jobs is quite pathetic given how other countries where technology has also advanced has not seen this drop in employment and given how in the past in the United States, technological progress has not been associated with falling employment.


Now, it clearly is true that new technology destroys some jobs. ATM's does reduce the number of bank tellers, just like industrial robots reduce the number of workers in factories.

However, as long as there are unsatisfied wants (and we are a very long way from achieving the utopia where this no longer exists), new jobs will arise. Some in creating new technology. Others in new jobs where a shortage of workers previously prevented the businesses from being created.

Thus, while in the transition process some temporary unemployment can be created by technological advances, it is not something that will in the foreseeable future create any kind of long term unemployment problem. And it is not the explanation for why the United States unlike many other nations at similar technological levels experience high unemployment. 

Yes, Removing Import Barriers Lowers Prices

In light of protests in Israel over the relatively high prices of cottage cheese, Prime Minister Benjamin Netanyahu now opens up for removing import barriers.

That seems like a smart move. If you exclude foreign competition, then you are bound to get artificially high prices. That is because first of all, some foreign companies may produce at lower costs and even if they aren't, the exclusion of foreign competition will enable local companies to have greater margins.

And as much as local producers might like that, it is bad for consumers and for the overall economy

Bastiat Goes To Greece

One of the most bizarre aspects of the Greek mess is how completely out of touch with reality the Greeks who protest the reductions in government spending are. There is simply put no other option when you have a large primary (excluding interest payments) deficits and no one wants to lend to you unless you agree to spending.

Defaulting is not a solution because that doesn't reduce the primary deficit (indeed, given the havoc it would create it would probably increase it).

Leaving the euro and re-impose the drachma wouldn't eliminate the deficit either, unless you start to directly finance it with "the printing presses", but that would create a massive inflation that would bring about the very reductions in real wages that the protestors are protesting against.

Raising taxes on the rich can at most cover only a very small part of the deficit, especially considering that the rich are likely to take measures to avoid these tax increases.

And the strikes and protest themselves only increase the need for spending cuts because they by weakening the economy reduces tax revenues. The Greek unions strikes are therefore as stupid as expressing dissatisfaction with the fact that you freeze by reducing heating further or taking off your shirt

So how could people be so unbelievably clueless like the Greek protestors? I think this is really a case of them being under Frederic Bastiat's old dictum "the State is the great illusion where everyone thinks they can live at the expense of everyone else". The Greeks have for years wanted and gotten from the politicians lavish social benefits but have refused to pay the taxes needed to finance these benefits, creating the large budget deficits.

Everyone saw the state as simply a means to live off others. In reality, it is of course impossible for everyone to live at expense of everyone else. And for limited groups to be able to live at the expense of others is only possible if there is someone willing and able to provide for them. And the rest of Europe is simply not willing to allow the Greeks to live at their expense for much .

The Greek protestors are thus a group of people who still cling to Bastiat's illusion that the state must continue to be a means for them to live at the expense of others, even as it is obvious that it is not possible any longer.

Statistical Notes Saturday June 18

-Economic news from the U.K. was mostly weak, with real retail sales in May dropping 1.4% from the previous month and rising only 0.2% from May 2010.


Employment in the quarter of February to April 2011 rose on the other hand slightly, but with nominal average weekly earnings increasing only 1.8% and inflation being 4.5%, real earnings for people with jobs dropped significantly. Moreover, jobless benefit claims rose in May compared to the previous month.

-U.S. economic news was also mixed, but mostly negative. Jobless claims fell
but the manufacturing surveys in both New York and Philadelphia weakened into negative territory.

-Both high unemployment Nevada and low unemployment North Dakota saw official unemployment drop despite an increase in the national rate. The difference is that the drop in Nevada seems to be driven by an increase in hidden unemployment and perhaps to some extent emigration (Because population figures aren't included, the relative importance of hidden unemployment and emigration is unclear) while North Dakota's drop reflects rising employment.

Employment in fact fell in Nevada by 0.6% while it rose by 1.5% in North Dakota. By comparison, employment was up 0.3% in the United States as a whole.

-Euro area inflation fell slightly, but there were big differences, with inflation falling the most in Greece, followed by Germany, Portugal and Ireland.  Greece and Portugal still have inflation above average due to past consumption tax increases, but the weak economies in those countries are putting downward pressure on inflation there. By contrast, inflation rose in Italy, Malta, Cyprus, Slovenia and Slovakia

Outside the euro area, inflation rose in most countries except for the U.K. where it was unchanged and Sweden and Hungary where it dropped.

-Hong Kong's unemployment rate was unchanged, but with labor force growth increasing half a percentage point, this means that its labor market strenghtened further.

-Israel's first quarter GDP growth was upwardly revised, particularly in terms of trade adjusted terms, from 3.8% to 5.15%  (my calculation)-

Core Inflation Is A Lagging Indicator

Tim Duy's Fed Watch writes

Core-CPI gained 0.3% in May, likely sending shivers down the spines of hawkishly inclined FOMC members.  This was predictable – the gains in headline-inflation were certain to translate into a temporary rise in the core numbers,

That gains in "headline" (all items) inflation precedes (or in other words predicts) changes  in "core inflation"  rather than the other way around is something that I've pointed out for years. The reason for why this is the case is that "core" prices are usually less flexible and more sticky, meaning that increased inflationary pressures will first be evident in food and energy prices, and only later in "core" prices.

But the funny thing here is that the official justification for looking at "core" CPI is that it predicts all-items inflation. Yet as Duy now concedes, and as data have long shown, it is the other way around and the only thing "core" CPI shows is what inflationary pressures was in the past.

What Intervention In Libya Has Caused

A number of U.S. Congressmen, including Democrat Dennis Kucinich and Republican Ron Paul , have sued President Obama because he has violated U.S. law by going to war in Libya for more than 60 days without approval from Congress. The law suit is (or at least should be) a "slam dunk" case, as the War Powers Resolution explicitly forbids actions of war for more than 60 days without Congressional approval and as we are now approaching 90 days of U.S. actions of war in Libya and as there has been no Congressional approval. If this legal strategy despite this fails, then impeachment of Obama for his illegal, unconstitutional policies seems appropriate.

Meanwhile, we now see higher price inflation and contracting economic activity. While it is not the only factor, one important factor behind this is the foolish intervention in Libya, which by prolonging the civil war there for months has raised oil prices, causing price inflation to increase and reducing real economic activity

Another Form Of Default

A Chinese credit rating agency points out that currency depreciation and inflation in effect constitutes default.

Monetary Conditions Tighten In China, Hong Kong

All the interest rate and reserve requirement increases in China seems to finally be having an effect as money supply and bank lending growth slows. By Western standards it is still very high, but by Chinese standards low.

This slowdown is essentially a good thing and will reduce the level of malinvestments. The short-term effect will however be slower growth and will also contribute to lower commodity prices. That is in turn bearish for commodity currencies like the dollars of Australia and Canada.

Meanwhile, property sales in semi-independent Hong Kong fell sharply after the government raised required down payments. This means that bank lending and money supply growth is likely cooling in Hong Kong as well.

Because of its U.S. dollar peg, Hong Kong is unable to use interest rates to cool down its property market so they instead use regulations that has a similar effect as higher interest rate would have except that this is more specifically targeted at the property market and doesn't cause a currency appreciation.

High Official Unemployment Rate Associated With High Hidden Unemployment

Perhaps not surprisingly, there is a strong correlation between the official unemployment rate and the level of hidden unemployment in the form of discouraged job applicants and the part-time unemployed.

In the year between Q2 2010 and Q1 2011, North Dakota had an average official unemployment rate of 3.8% and an additional 3.6% of hidden unemployment while Nevada that had 14.2% official unemployment rate and an additional 9.5% in hidden unemployment. Other low unemployment states like South Dakota, Nebraska and New Hampshire also had low rates of hidden unemployment while other high unemployment states like California and Michigan also had high levels of hidden unemployment.

This makes sense as job seekers are more likely to become discouraged and quit trying to get jobs if there is more competion for available job openings and as increased ease for the full time unemployed to get jobs will also make it easier for the part-time unemployed to get full time jobs.

I could as a side note say that the number of discouraged workers (including "marginally attached to the labor market") is probably generally underestimated. The labor force participation rate has dropped by 3.3% (2.2 percentage points which is 3.3% of the late 2006 participation rate of 66.4%) since the 2007-09 slump started, and discouraged workers existed even then, yet the Bureau of Labor statistics claims that the percentage of discouraged workers in the broadest sense just rose from 0.8% to 1.2%.

While it can't be ruled out that more people have for reasons unrelated to labor market conditions decided to become for example homemakers instead, it is implausible that the increase is really so great and that it coincidentally happened when the labor market slumped. That is why I think the percentage of discouraged job seekers are several times larger than the Bureau of Labor statistics claims. And for reasons explained above it is likely far higher in high unemployment states like Nevada and California than in low unemployment states like the Dakotas.

Statistical Notes, Saturday June 11

-Industrial production in the U.K. fell sharply in April this year, down by 1.7% compared to the previous month and 1.2% compared to April 2010. A number of special factors including the royal wedding and the inavailability of components from Japan is blamed for the drop, but given the size of the drop, it is clear that it also reflects underlying economic weakness.

-The U.S. trade deficit fell sharply in April. However, the drop was driven mostly by factors of a temporary kind, like reduced component shipments from Japan.

The federal budget deficit fell even more in May, reflecting both rising tax revenues due to an increase in inequality and slower growth in federal spending.

Meanwhile, asset values diverged during the first quarter as the value of homes fell, while stock values rose. The increase in stock values have however been reversed during this quarter.

-Canadian unemployment fell to a new low of 7.4% in May, reflecting in part an increase in employment and in part a drop in the labor force participation rate.

-Australia also had an increase in employment but the change compared to the previous month was slower than was needed to accomodate the nearly 2% population growth rate in Australia.  The yearly increase of 2.3%  was however enough to enable both a small increase in the participation rate and a drop in the unemployment rate.

-Economic activity in Germany weakened in April as both exports and industrial production fell from the previous month (though especially exports were up significantly from the previous year). Manufacturing orders on the other hand rose, but that was after a similar sized drop the previous month. All of this suggests that German growth slowed down significantly during the first quarter.

Meanwhile, German consumer price inflation slowed down to 2.4% in May from 2.6% in April, weakening the case for further ECB rate hikes.


-The labor market in Israel continued to improve as employment rose 3.2% while real wages rose a more moderate 0.2%  (that's not much, but real wages in most other countries have dropped) compared to the previous year.

Why U.S. U.S. Recession Was Deeper Than GDP Numbers Suggests

I have repeatedly called into attention (for example here) the fact that the income based numbers gross domestic income/national income have been a lot weaker the past few years than the expenditure based gross domestic product/net national product, even though they theoretically should be identical. This means that the U.S. recession was a lot deeper than the GDP numbers suggested, something that is reflected in the fact that though GDP fell less than in most other countries, employment fell more. The below chart illustrates this discrepancy.

Here is an article from Jeremy Nailwaick which also calls this fact into attention and also argues that the income numbers are more reliable than the expenditure numbers.

North Dakota Had America's Strongest Economy

That North Dakota's economy is stronger than that of other American ststes isn't exactly news to regular readers of this blog, but it was now officially confirmed that it had faster growth than all other 49 states (and the District of Columbia).

The Non-Success Of QE2

Ryan Avent claims that QE2 was a big success. That is a really strange definition of success. Since August last year, the employment to population ratio has dropped from 58.5% to 58.4%. Meanwhile, real average weekly earnings are down more than 1%. That means that average labor income dropped 1.2%.

By contrast in the preceding 8 months (from December 2009 to August 2010), real average weekly earnings rose 1%, while the employment rate rose from 58.2% to 58.5%, implying an increase in average labor income of 1.5% Even if you instead use the November or January base of 58.5%, we're still talking about a 1% gain, compared to the drop of more than 1%.

While some on Wall Street have gained a lot from QE2, it should be clear that QE2 has only (apart from the many other side effects, that is) served to make most Americans poorer.

Carbon Tax Would Weaken Australia

Australian Prime Minister Julia Gillard faces a potential revolt in her party on the issue of a carbon tax.

This is very understandable, because Australia as a large exporter of coal has more than most other countries to loose from a carbon tax.

In countries that are net importers of carbon based energy, the efficiency loss from a carbon tax is at least in part cancelled out by an improvement in terms of trade, as the tax reduces the price excluding taxes. But in Australia and other net exporters, the terms of trade effect reinforces the efficency loss and thus aggravates the economic losses.

"Arab Spring" Means Short-Term Economic Winter

At least in the short-termn, the Arab uprisings referred to by Western optimists as "the Arab spring" have seriously damaged the economies of those countries. The long-term effects depends on what kind of governments will prevail. If fundamentalist groups like the Muslim Brotherhood takes over, the long-term economic outlook will also weaken.

Good News From Portugal

Portugal took a right-wing turn as the left-wing Socialist Party lost to the centre-right Social Democratic Party and the conservative Democratic and Social Center Party.

This was likely mostly a protest vote against the ruling Socialists, rather than an endorsement of the winners, but even so, this will mean that Portugal's inevitable austerity measures will to a higher extent take the form of spending cuts rather than tax increases, something that will strengthen Portugal's economy.

Economics Sometimes Overcomes Politics

Despite the increasing hostility between the governments of Turkey and Israel, Israeli exports to Turkey soars as much as 73%. Many of the more secularist corporte leaders in Turkey don't seem to share the more hostile attitude towards Israel of the current moderate Islamist government in Turkey.

Rothbard Describes Current Economic Debate

In his book America's Great Depression, Murray Rothbard pointed to the problem of testing theories empirically:

"Suppose a theory asserts that a certain policy will cure a depression. The government, obedient to the theory, puts the policy into effect. The depression is not cured. The critics and advocates of the theory now leap to the fore with interpretations. The critics say that failure proves the theory incorrect. The advocates say that the government erred in not pursuing the theory boldly enough, and that what is needed is stronger measures in the same direction."

As it becomes increasingly evident that Obama's policies have utterly failed to create a recovery worth mentioning, and as the risk of a double-dip rises, we keep hearing from anti-Keynesians that this proves Keynesianism wrong, while Keynesians like Paul Krugman and others argue that this proves that Obama's policies didn't pursue Keynesian policies boldly enough as he didn't increase deficit spending enough (and that increased deficit spending now is the solution). In other words, the situation is exactly like Rothbard described it, with Keynesianism being the theory put in place.

Unemployment Underestimated Relative To 1930s

One problem when comparing unemployment, as well as price inflation, money supply growth and economic growth, between different countries and different periods, is that definitions are often different, making comparisons misleading in some cases.

I have discussed this problem regarding inflation before and here is an article arguing that the definition of unemployment was wider in the 1930s than now, meaning that either unemployment then was overestimated, or that unemployment now is underestimated depending on which definition you think is correct. Regardless of whether you think it was overestimated in the past or underestimated now (or both) however, it is clear that the unemployment situation relative to the 1930s is worse than the most commonly used numbers suggests.

Statistical Notes Friday June 3

-The U.S. employment report was as expected pretty weak, but slightly less so than the ADP payroll survey. Average hourly earnings posted a seemingly robust 0.3% gain, but this is largely cancelled out by a downward revision of previous months increases.

Meanwhile, the ISM non-manufacturing survey rose slightly, contradicting the otherwise consistent flow of data suggesting weaker growth.

-Declines in the manufacturing survey and the service sector survey in the U.K. indicates that British growth is weakening too.

-Euro area manufacturing and service sector surveys also declined, also suggesting weaker growth in the euro area.

-Finland's first quarter GDP growth remained at 5.5%, while Denmark's economy fell back into a recession. A rising trade surplus thanks to rising exports to booming Baltic sea neighbors like Germany, Sweden, Finland and Estonia provides a boost to Danish growth, but not enough to offsett falling domestic demand.

-New Zealand's trade surplus rose to an all-time high in April. New Zealand has traditionally had a deficit, but it has recently turned into a large surplus, owing largely to higher prices for key export items dairy and meat.

-While traditional rival/enemy Greece suffers from a contracting economy and excessive government deficit, Turkey's economy is showing obvious signs of over-heating with consumer price inflation up to 7.2% and the current account deficit approaching 10% of GDP.

Increased Evidence Of A Weaker U.S. Economy

Right now, data are pretty consistently pointing to a significant weakening of what was a very weak "recovery" to begin with. Just today we saw:

-The ADP employment report showing a mere 38,000 new private sector jobs, far short of what is needed to keep up with population growth, much less recovering the lost ground during the slump.

-ISM manufacturing survey index drops sharply, from 60.4 to 53.5, with the key new orders and production sub indexes falling the most.

-While construction spending according to initial estimates rose in April compared to the previous month, the absolute level was lower than before and lower than forecasts because of sharp downward revisions of previous numbers.

-Car sales fell as much as 10.2% in May compared to the previous month in seasonally adjusted terms.

Particularly car sales and manufacturing were probably in part weak because of supply disruptions caused by the Japanese earthquake/tsunami, something that will be reversed soon. However, even after taking that into account, it seems increasingly clear that the underlying strength of the U.S. economy is deteriorating.

Recession Continues For American Workers

Investor's Business Daily points out that this is the second anniversary of the U.S. recovery, and also points out that it has been extremely feeble with barely any job growth and falling real wages.

But as it happens the situation is even worse than the editorial says, because if you relate job growth to population growth (which you should)you can see that, in April this year (the latest month available until Friday), the employment to population ratio was 58.4%, compared to 59.4% in June 2009, the first month of the supposed recovery.

Meanwhile, real weekly earnings for those that have jobs are 0.5% lower than 2 years ago.

For American workers, there haven't thus been any recovery at all. For them, the recession has in fact continued.