Go Ahead, Make Our Day

Now let's see, the Greeks are getting an unjust €100 billion give away in debt write downs and are despite this allowed to spend more of other people's money, and they are angry about the deal. Well, do please make our day, and reject the deal, so that (hopefully) you will be on your own then. Given your primary deficit, the required austerity will be a lot greater then. It will be really funny to see how much the crybaby moocher "protesters" like that.

Republican Hypocricy On Spending

For once, I agree with leftists like Paul Krugman and Matthew Yglesias: Republicans that argue that reductions in military spending because it could make people depending on it unemployed are hypocritical and self-contradictory.

These same Republicans have been arguing for reductions in non-military spending on the ground that it would boost confidence and thus create jobs. But if that argument is true, then reductions in military spending would have the same effect There is no reason to believe that the economy would be affected differently from military and non-military spending. Conversely, if reductions in military spending really is job-killing, then so is reductions in non-military spending. Either way, Republicans stand for a position in one of those areas which according to their arguments in the other area is job-killing.

This doesn't necessarily mean that the Republican position is contradictory. One could perhaps argue that military spending shouldn't be cut because the Russians or the Chinese (or space aliens!) would invade otherwise, or because having a global empire and intervening in various third world civil wars is such a good thing. I don't agree with these other arguments, but at least they're not self-contradictory.

Statistical Notes Friday October 28

-Quarterly GDP growth increased in the U.S. to 0.6% (or 2.5% at an annualized rate) in the third quarter according to preliminary estimates. However, September real disposable income declined for a third straight month, causing the savings rate to drop to 3.6%-the lowest since December 2007.

-Consumer price inflation in Australia fell to 3.5% in the third quarter, from 3.5% in the second.

-Employment in Spain fell by 2.1% in the year to the second quarter, increasing its unemployment rate to 21.5%. In the province of Andalucia, the unemployment rate is as high as 30.9%.

-Retail sales fell in Sweden in September by 0.6% compared to a year earlier, while its trade surplus rose.

-Real retail sales in September rose in Latvia by 0.9% compared to the previous month and 8.1% compared to September 2010.

-Employment in Japan fell by 0.5% in the year to September but since the labor force shrank, the unemployment rate fell to 4.1%, Note that this excludes the area around the Fukushima reactor. If that had been included employment would have fallen even more and unemployment would have been higher.

The Worst Possible Deal

Markets reacted seemingly positive on the new deal on Greek debt. However, I believe that this reaction is mistaken.

The underlying, fundamental problem about Greece is that as they are a nation of freeloaders. While I should of course clarify that this description isn't applicable to all individual Greeks, it certainly is applicable to the people of Greece as a collective. The nation which once spawned history's greatest philosopher, Aristotle, has sunken really low. The key facts illustrating this is that both the government budget deficit and the current account deficit is roughly 10% of GDP, meaning that Greece spends more than 10% more than they earn.

If this extra spending had been spent on good investments then it wouldn't have been a problem, but in practice nearly everything has been spent on excess consumption (and to a lesser extent in some cases malinvestments). The Greeks have demanded and mostly gotten a lavish welfare state while they have through tax evasion refused to pay the taxes needed to finance the lavish welfare state they have demanded. In short, the Greeks have as a group demanded the right to live at the expense of others. Few foreigners however pitty the Greeks enough to willingly simply give them money especially since Greece already receices a large net gain from the EU budget so they "cooked the books" and tricked foreigners into giving them money.

Now a deal has been made which says that private lenders will "voluntarily" write down their holdings by 50%. As a result, the Greek fraudsters will get away with living at the expense of others in the past. But unlike what would happen in an outright default, the Greek debt writedown won't mean that their credit line will be cut off. Outrageously enough, EU leaders won't just reward the Greeks for spending too much in the oast, they will actively enable them to spend too much now.

The end result of this is of course that Greece will continue too mooch from the outside world, and that the problem will thus remain unsolved.

Funny Argument About 9-9-9 Plan

Regarding Herman Cain's 9-9-9 plan there are four things to remember. First, it is actually more like 9-9-9-9, because one of the 9:s is two 9:s, namely the business tax which is 9% of all value added, both profits and labor cost, meaning it is a combined 9% payroll tax and 9% corporate income tax. Second, because it reduces marginal tax rates it will boost growth. Thirdly, despite the former point it would likely mean lower revenue. And fourth, because it also has the effect of redistributing the tax burden from the rich to the poor and the middle class, it is politically impossible. If Cain became the Republican nominee, the Obama campaign would have a field day pointing to how it would increase the middle class tax burden while reducing taxes for the rich. And even if by some miracle Cain became President, it wouldn't pass Congress.

The funniest (but obviously not valid) argument against the plan was this point from Cain's rival Michelle Bachmann.

Shocking News

When monetary policy is more loose, banks are more likely to make risky loans. Who would have thought that if risky loans became more profitable for banks, banks would make more risky loans?

Statistical Notes Tuesday October 25

-Retail sales in the U.K. rose by 0.6% in September both compared to the previous month and September 2010. Meanwhile, the budget deficit fell from £71 billion in April-September 2010 to £63.5 billion in April-September 2011.

-Consumer prices in the U.S. rose in September by 0.3% compared to the previous month and 3.9% compared to September 2010, while initial unemployment claims fell slightly to 403,000.

-Preliminary Euro area PMI fell in October to a new low of 47.2, but August industrial new orders rose by 1.9% compared to the previous month and 6.2% compared to August 2010.

-Portugal's current account deficit fell in August to just €37 million from €971 million in August 2010. For the entire January-August period, the deficit dropped more moderately, from €11.4 billion in 2010 to €8.75 billion.

Greece's current account deficit also fell, but by a lot less than in Portugal, from €200 million in August 2010 to €145 million in August 2011. For the entire January-August period the deficit fell from €15.15 billion to €13.9 billion.

-Exports in Japan rose in September by 2.4% compared to a year earlier, while imports rose by 12.1%, reducing the surplus from 774 million yen (about $10 billion) to 300 million yen (about $4 billion).

-Employment in Taiwan fell in September by 0.3% compared to the previous month, but were still up by 2.1% compared to September 2010. And because of a drop in the labor force, the unemployment rate fell to 4.3%, the lowest since 2008.

Average wages in Taiwan similarly fell compared to the previous month, but were up by 4.6% compared to a year earlier in nominal terms,m which given Taiwan's 1.35% inflation rate means that real wages were up by 3.2%.

Matthew Yglesias Strange Critique Of ABCT

After being asked by a reader to refute the Austrian business cycle theory, Matthew Yglesias after linking to Paul Krugman's old attack on it, ( Which I refuted here), he attacks the concept of malinvestments.

First he seems to try to make a distinction between "making society worse off than it otherwise would have been" (which he at this point admits that malinvestments do) and "makes society worse off (which he denies there is). But there is in the context off analzsing the effects of malinvestments no distinction between these two conepts. Whether or not the economy because of other factors improves or not is irrelevant, the only relevant thing is whether the malinvestments makes it worse or not compared to how it otherwise would have been.

Then he argues that later after the malinvestments have been made, they are "sunk costs" and therefore not a problem. But because the capital invested could have been invested more usefully, they result in a lower living standard, or resulted in a lower living standard in the past if it had been consumed. And more importantly, because of the problem of sectoral immobility of workers, mass unemployment is created. Because of that, and the depressing effect on investments, output is permanently lowered because of these malinvestments.

Inequality Driven By Stock Market

Robert Frank points out that while in the past the incomes of the rich in America fluctuated less during cyclical booms and busts than the incomes of the rest, they are now fluctuating a lot more than those of the rest.

The reason for that is that while in the past much of their income came from interest income they now depend more on dividends and capital gains as the top 1% own 50% of stocks. And as the stock market is highly cyclical, this means that the incomes of the rich will also be highly cyclical.

This also explains why inequality after having fallen during the 2007-09 contraction again has widened despite the fact that the recovery has been anything but impressive. For various reasons, most notably the inflationary policy of the Fed, the stock market has disconnected from the general economy and recovered very strongly despite the weakness of the general economic recovery.

Good Ron Paul Article About Financial Crisis

In case you haven't seen it yet, Ron Paul has a good article about the financial crisis and the Fed in Wall Street Journal.

My one objection is that he thinks (or at least gives the impression in the article that he thinks) that the abolition of the Fed (and other central banks) would mean no more financial crisis. But as the existence of financial panics before the creation of the Fed in 1913 illustrates, that is not true. The really crisis generating institution is instead fractional reserve banking.

Robert Reich Misleads On Clinton Era

In an article arguing against austerity, Robert Reich ironically holds the Bill Clinton presidency as a role model. Yet even setting aside the issue of the tech bubble, the Clinton era was in fact characterized by austerity, tax increases were combined with spending cuts. During the Clinton years federal spending dropped from 22.2% in 1992 to 18.2% in 2000, a much bigger drop than under any other modern President.

China Likely To Surpass U.S. Faster Than Previously Thought

Ryan Avent notes that China's GDP deflator increases faster than its consumer price index, implying according to him an even faster real appreciation of the yuan.

As I've noted before, one should be careful in using aggregate price indexes for estimating competitiveness because they are composed of different goods and services in different countries.

One implication that is certain however is the fact that the Chinese GDP deflator grows so fast means that the relative size of China's economy is growing even faster than the published real GDP numbers suggests. This means that China's economy could overtake the United States as the world's biggest economy even faster than previously thought. I previously estimated that it would happen in 2024, but considering this factor, it seems that it will probably happen even sooner.

Statistical Notes Tuesday October 18

-British consumer price inflation rose from 4.5% to 5.2% in September. During the latest 6 years, inflation has averaged 3.2%, meaning that it has systematically exceeded not just the 2% target, but also the supposed 3% ceiling that according to law compels Barn of England Governor Mervyn King to write an explanatory letter to the Chancellor of the exchequer.

-Consistent with the latest manufacturing survey, U.S. industrial production rose 0.2% in September, while retail sales rose 1.1% in nominal terms.

Meanwhile, producer prices rose in September by 0.8% compared to the previous month and by 6.9% compared to September 2010.

-Canadian house prices rose 6.5%, meaning that the Canadian housing bubble continues to grow larger.

-Third quarter GDP growth in Singapore was just 0.3% (1.3% annualized) compared to Q2 2011, but yearly growth still increased from 1% to 5.9% because third quarter growth was negative last year.

-Third quarter GDP growth in China fell back to a lower than expected 9.1% from 9.5%, but growth in both retail sales (from 17% to 17.7%) and industrial production (from 13.5% to 13.8%) increased in September compared to August.

-Employment in Hong Kong grew by 3.8% and full-time employment grew by 4% in the latest year. Full-time unemployment therefore fell from 4.2% to 3.2% and part-time unemployment from 1.9% to 1.7% even as the labor force grew by 2.8%

Real Commodity Prices In The Long Run & The Penn Effect

The below chart shows that though there are occassional periods of commodity prices booms (like the latest decade) in the long run, commodity prices have fallen relative to the prices of finished goods and services. This of course contradicts the views of those who claims that the world is running out of natural resources.

Does this mean that the future will necessarily be the same? No, not necessarily, but probably because the same mechanisms that have held back commodity prices in the past will continue to be there, Namely, that whenever a commodity has increased in price, this has increased supply by increased exploration and extraction (or planting in the case of food commodities) as well as increasing demand for substitutes and technological solutions to use it more efficiently. All of this causes the price increases to be self-reserving.

However, it is possible that for slow growing economies in America, Europe and Japan relative commodity prices could rise, while they fall in fast growing economies in for example Asia excluding Japan. The reason is that the relative price level in weaker growing economies because of the Penn Effect will, either because of lower price inflation, depreciating currencies or a combination of the two. Since commodity prices are basically the same across the world, a falling relative general price level in weaker economies means that for them inflation adjusted commodity prices could rise while the relative increase in the price level of stronger economies means that for them inflation adjusted commodity prices.

Good Article About The Methodology Of Economics

"John" at the "money life reason" blog has written a really good article about the proper methodology of economics, arguing against the mathematical/instrumentalist approach that for example Milton Friedman has advocated, a subject more relevant than ever after the unfortunate awarding of a Nobel prize in economics for the creation of misleading mathematical models.

The article is quite long, but is definitely worth the time it takes to read it, so read it here.

Leftists Need To Learn About Long & Short Term

Matthew Yglesias argues that Rick Perry's comment that it would be treasonous to try to help Obama by inflating more proves that Republicans want to wreck the economy in order to prevent Obama from being re-elected, because the only way that inflating more would help Obama is if the economy became stronger by re-election day.

Now, it is likely that some Republicans (and non-Republican opponents of Obama) may feel that it is worth weakening the economy for the purpose of hurting Obama, because they think that without Obama economic policy will become better and so make the economy stronger in the long term or because they for other reasons resent the fact that Obama is President so much that a permanently weaker economy would be worth it if it meant ending Obama's Presidency. However, it is not the case that Perry's statements or any other statements against more inflation necessarily implies this.

The reason for that is that inflationary policies can sometimes (but not always) strengthen an economy in the short-term, but still weaken it in the long-term. Alan Greenspan's inflating of the housing bubble probably meant a short-term boost to the U.S. economy, but it also meant the problems America has seen in the last few years. And there is certainly a risk that inflationary policies from Bernanke now while boosting the economy in the coming year or so, will similarly create new troubles a few years from now, and that these problems will be so serious that the short-term benefits won't be worth it.

Statistical Notes Thursday October 13

-The British unemployment rate rose to 8.1% in the three months to August, the highest since 1996, as the employment rate fell from 70.7% in the three months to May to 70.4% in the three months to August.

These numbers will likely not improve as claims for jobless benefits rose in September from August. Meanwhile, annual earnings growth for those who have jobs fell from 2.9% to 2.8% in nominal terms, something that given the 4.5% inflation rate means a reduction in real wages.

The U.K. trade deficit fell to £1.9 billion as both imports and exports fell.

-The U.S. trade deficit was unchanged at $45.6 billion in August, while the July deficit was upwardly revised from $44.8 billion. Compared to a year earlier, exports rose 14.7%, while imports rose 11.3%. Because imports was larger than exports to begin with, the trade deficit still rose slightly from a year earlier.

Meanwhile, initial jobless claims fell slightly to 404,000 from an upwardly revised 405,000 (initially reported as 401,000.

-Employment in Australia rose 0.2% in September compared to August, and 1.1% compared to September 2010. Unemployment fell to 5.2% from 5.3% the previous month, but is up from 5.1% a year earlier.

-Inflation in Germany rose in September to 2.9% from 2.5%, a higher than initially estimated increase.

-Euro area industrial production rose by 1.2% in August compared to July and 5.3% compared to August 2010. The annual rate of changed ranged from +22.7% in Estonia to -12.3% in Greece.

-China's trade surplus

-Employment in South Korea rose by 1.1% in September compared to a year earlier, pushing down the unemployment rate to 3.0% from 3.4% a year earlier.

Weak Economy Reducing Population Growth

The link between population growth and economic growth goes both way. Higher/lower population growth should (assuming it increases the labor force) increase/decrease economic growth all else being equal, but it is also the case that higher/lower economic growth increases/decreases population growth.

We can see the latter in the case of Spain, whose population growth increased during its housing fueled boom, from 1.07% in 2000 to 1.82% in 2007, only to collapse to 0.36% in 2010, with population population growth expected to be negative this year.

Similarly, Ireland's population growth increased from less than 1% in 1999 to about 2.5% in 2006, only to drop to 0.3% in 2010.

Similarly, Nevada had really rapid population growth during the bubble, but now the population has stopped growing.

There are two reasons for this. The most important is that a booming economy will make more people want to move to a state or country, while an economic downturn will prompt people to leave. The other reason is that a boom will make people more likely to feel that they can afford to have children, while an economic downturn and the job losses or fear of losing your job in the future will make more people unable to afford to have children, or fear that they might be unable to afford it in the future.

We can see this in this interesting graph in the Wall Street Journal. The states with the sharpest downturns have seen their fertility rates drop sharply, with a drop between 2007 and 2009 of 5.3% in California and 7.7% in Nevada. By contrast, booming North Dakota has seen its fertility rate increase by 1.2%.

Interestingly, the fertility rate hasn't however dropped in Ireland, and has remained at a very high level. The sharp drop in its population growth is thus entirely due to a swing from large scale net immigration to significant net emigration.

Statistical Notes Tuesday October 11

-British industrial production rose in August by 0.2% compared to July, but fell by 1% compared to August 2010.

-Both factory orders and industrial production fell in Sweden in August compared to July, but was up compared to August 2010. The EU-harmonized rate of inflation fell slightly, from 1.6% to 1.5%.

-In August Danish exports increased 7% and imports 10% compared to a year earlier. The current account surplus however still rose somewhat due to a bigger surplus in net factor income from abroad.

-German exports rose in August by 3.5% compared to July and by 14.6% compared to August 2010, causing its trade- and current account surplus to increase.

-Estonia's export boom continued, increasing by 45% in August compared to a year earlier, while imports increased 42%.

Latvia's foreign trade in August increased at a lower, but still high rate, with exports up 27% and imports 20%. In Lithuania exports increased 22% and imports 26%.

-Industrial production in Ireland rose in August by 3.6% compared to July and 11.4% compared to August 2010.

A Nobel Prize For Useless Econometrics

Thomas Sargent and Christoper Sims received the 2011 nobel price in economics. According to the official "information for the public" page from the Nobel web site, they receive it basically for developing new econometric models for estimating the link between economic policy measures and macroeconomic variables like GDP, inflation and unemployment.

The usefulness of such models are highly questionable to say the least because first of all, many of the variables impacting the economy are unknown, and secondly even if somehow this problem was overcome (or ignored), it would at most tell as the link during a particular period of time and place. The response of economic actors to for example tax or interest rate changes will be different in different countries-and different even in the same country during different periods of periods of time. Thus, these models can at most provide economic history, but it can't provide any universal quantitative economic laws because such laws don't exist.

One example of this is how Sims in the application of his model has concluded that monetary policy can't affect price inflation before 1-2 years after its implementation (a conclusion mentioned in the release linked to above). Yet after QE2 was announced and implemented, price inflation started rising pretty much immediately, and within a year had risen from about 1% to nearly 4%.

So I really do not think Sargent and Sims deserve this price. And unfortunately this will promote the excessive use of and over-belief in mathematical models that are making academic economics (particularly the "advanced" courses) in most universities irrelevant for understanding the economy.

China's $240 Billion Foreign Aid

I have argued for a long time that it is wrong headed to blame China for the economic woes in America or other places and that it might not benefit the outside world if the yuan became significantly stronger. Furthermore, considering the recent dramatic drops in other Asian currencies except the yen and the continued slow appreciation of the yuan, it is questionable whether China is really holding down its currency that much compared to the level it would have had if it were freely floating (For reasons that I explained here, China's foreign exchange reserve accumulation doesn't prove that a floating yuan would be more expensive) . If it had been freely floating it would have likely dropped dramatically along with other non-Japanese Asian currencies because of the "flight to [perceived] safety" demand for U.S. dollar and yen assets.

It is however probably in China's best interest to end its policy of slow appreciation and allow faster appreciation. One reason is that it would better contain inflation. Another reason is that China is losing big from its accumulation of foreign exchange reserves. By for example investing in U.S. Treasuries they receive a lower interest in a currency that is depreciating, creating big losses. According to estimates made here, China loses as much as $240 billion per year by investing in loss creating assets like U.S. Treasuries.

This means that China is in effect giving away $240 billion to the rest of the world through its exchange rate interventions, making China the world's biggest foreign aid donor. It is true (assuming that the yuan really is undervalued or at least not significantly overvalued) that this is at this point more or less a sunk cost given that these asset purchases have been made. However, by ending foreign asset purchases it can stop the continued increase in losses. If it by contrast persists in these purchases, future annual losses will rise far above $240 billion.

Strong U.S. September Jobs Report

Contrary to previous months this year, the September jobs report was unequivocally strong. While most analysts tend to focus only on the payroll job number (which rose a higher than expected 103,000), other elements were in fact even stronger.

-First of all, the payroll number for previous months were upwardly revised by a total of 99,000.

-Secondly, like the previous month, but unlike the months before that, the household survey number was even stronger, showing a gain of 398,000. As a result, the employment to population ratio rose to 58.3% from 58.2%.

-Thirdly, average hourly earnings rose 0.2% and average weekly earnings rose 0.5% in nominal terms, though that just reflects a reversal of the previous months drop in both cases, meaning that in real terms September real wages are likely lower than in July.

This report clearly contradicts the "double dip" scenario.

BTW, the United States' northern neighbor Canada had even stronger job growth in September.

Statistical Notes Thursday October 6

-U.K. second quarter GDP growth was revised down to 0.1% compared to Q1 2011 and 0.6% compared to Q2 2010. Adjusted for terms of trade, growth was 0.2% compared to Q1 2011 and 0 (zero) compared to Q2 2010.

-The ISM non-manufacturing survey fell somewhat, from 53.3 to 53 while the manufacturing index rose, from 50.6 to 51.6. Construction spending rose in August by 1.4% compared to July, but was still lower than in June.

Meanwhile, initial jobless claims rose just 6,000 to 401,000, a smaller than expected increase given the dramatic drop the previous week.

-Australia's trade surplus rose from $1.8 billion in July to $3.1 billion in August due to a big increase in exports.

-Real retail sales fell in the euro area fell in August by 0.3% compared to July 2011 and 1.0% compared to August 2010.

-German factory orders fell by 1.4% in August, the second monthly drop in a row, but were still up 3.6% in seasonally adjusted terms compared to a year earlier.

-Industrial production in South Korea fell by 0.3% in August compared to the previous month, but was up by 3.9% compared to the previous year.

-Retail sales in Hong Kong continued to rise rapidly in August compared to a year earlier, up by 20.7% in real terms and 29% in nominal terms. The rate of increase was however somewhat lower than previous months, particularly in real terms.

-Employment in Israel rose by 3.3% in the year to July, while real wages rose by 0.2%.

About The Canadian Housing Bubble

A Canadian reader sent me this interesting analysis of the Canadian housing bubble. It hasn't bursted yet, and won't as long as commodity prices stays high, but if the recent drop in commodity prices continues, it will burst.

The Irony Of China Bashing

For the past few months, only one currency apart from the yen, has appreciated in value against the U.S. dollar. That currency is of course the Chinese yuan. By contrast, the currencies of several other Asian countries and also Nordic countries with larger current account surpluses relative to GDP than China, like Denmark, Norway and Sweden have dropped more than 10%.

Yet the morons that have most of the seats in the U.S. Congress decides to target the country with the strongest currency, China, for having a too weak currency. What's next, they're gonna bash Saudi Arabia (who BTW also has a bigger relative surplus and a weaker currency than China) for not enforcing Islamic religious laws zealously enough?