Category: Economy

Analysis of the global economy

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Expanding debt: Dousing the flames with gasoline

We are now in the fifth year of recovery from the worst financial crisis in 50 years — fueled by expanding household debt, rising from 50% of GDP in the 1980s to close to 100% in 2008. Contraction since the GFC has brought US household debt back to 80% of GDP…

Household Debt as % of GDP

But a worrying sign is that consumer debt has started to rise
Consumer Debt as a % of Disposable Income

And Steve Keen points out that margin debt is also rising, fueling the latest stock market rally.

Yahoo: Steve Keen Interview
[click on the image to view the video in a separate window]

Holding interest rates at artificially low levels for an extended period risks fueling another credit bubble. The Fed/central bank needs to react quickly to expanding credit in any area of the economy. We all hope for a recovery, but it must be sustainable — with consumption fueled by rising employment rather than rising debt — and not another debt-fueled boom-then-bust.

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Milton Friedman: The closest thing to a free lunch [video]

Milton Friedman, recipient of the 1976 Nobel Prize for Economic Science, leader of the Chicago School of economics, gave this prescient address at the Cato Institute in 1993. While lengthy [49:93] this superb performance shows one of the great minds of the 20th century at his best.

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Why British prosperity is hobbled by a rigged land market | Centre for European Reform

Simon Tilford, chief economist at the Centre for European Reform, writes:

The British have the least living space per head, the most expensive office rents and the most congested infrastructure of any EU-15 country. Thanks to a rapidly growing population – the result of a healthy birth-rate and immigration – these trends are worsening steadily. At the same time, the British economy is languishing in a prolonged slump brought on by a collapse of demand. The answer is obvious: Britain needs to build more. Unfortunately, the obstacles to development are formidable….

A similar problem to Australia: restricted land release drives up prices, making home ownership inaccessible to the younger generation while damaging the construction industry.

Read more at Centre for European Reform: Why British prosperity is hobbled by a rigged land market.

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Government Debt and Deficits Are Not the Problem. Private Debt Is. | Michael Hudson

Professor Michael Hudson writes:

Student loan debt, now the second largest debt in the US at around $1 trillion, is the one kind of debt that has been growing since 2008. It is depriving new graduates of the ability to start families and buy new homes. This debt is partly a byproduct of cutbacks in federal and local aid to the universities, and partly of turning them into profit centers – financializing education to squeeze out an economic surplus to invest in real estate and financial holdings, to pay much higher salaries to upper management (but not to professors, who are being replaced by part-time, un-tenured help), and especially to create a thriving high-profit, zero-risk, government guaranteed loan business for banks.

This is not really “socializing” student loans. Its social effects are regressive and negative. It is a bank-friendly giveaway that is helping polarize the economy.

via Government Debt and Deficits Are Not the Problem. Private Debt Is. | Michael Hudson.

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What is Modern Monetary Theory, or “MMT”? | naked capitalism

Dale Pierce makes this comment when discussing make-work programs in his introduction to Modern Monetary Theory:

Whether the job-guarantee program makes fighter planes or wind turbines makes no economic difference – the workers employed by it will spend their wages on the same things other workers buy.

What he fails to consider is that wind turbines make an on-going contribution to GDP — from the electricity that they generate — while creating jobs at zero cost to the taxpayer to maintain the turbines. Fighter jets when built, on the other hand, make no further contribution to GDP growth and are a continual drain on the taxpayer’s purse for running and maintenance costs. While I support government or public/private infrastructure programs, we have to ensure that the investment is in productive assets that contribute to GDP and enhance future growth. Otherwise we may as well pay people to dig holes in the ground and then pay others to fill them in — at least the on-going maintenance costs would be low.
Read more at What is Modern Monetary Theory, or “MMT”? « naked capitalism.

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Australia: Net international investment position worse than Italy

Wikipedia provide a ranking of countries net international investment position, as a % of GDP, from highest to lowest.

Top of the list are the usual suspects:

Country Date NIIP as % of GDP
Hong Kong 2009 353
Singapore 2010 224
Republic of China 2010 153
Switzerland 2010 136
Norway 2010 96

But Australia and New Zealand are in the wrong sort of company at the bottom of the list.

Country Date NIIP as % of GDP
Poland 2010 -63
Australia 2011 -64
Slovakia 2010 -66
Estonia 2010 -71
Spain 2010 -87
New Zealand 2009 -90
Greece 2010 -93
Ireland 2009 -98
Portugal 2009 -108

Interestingly, Italy’s 2010 net international investment position is only -24%.

Source: Wikipedia: Net international investment position

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S&P 500 tests 2007 high

Dow Jones Industrial Average has broken through its previous high at 14,000. Long-term (13-week) Twiggs Money Flow oscillating above zero indicates strong buying pressure.
S&P 500 Index
Bellwether transport stock Fedex breakout above $100 signals rising economic activity.
Fedex

The S&P 500 is testing its 2007 high at 1550. Rising 13-week Twiggs Money Flow indicates strong buying pressure. Reversal below the latest trendline is unlikely at present but would warn of a correction. Target for the current advance is 1600*.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

VIX Volatility Index is headed for its 2005 lows at 0.10. While this coincided with the start of a ($SPX) bull market in 1995, it also occurred just before the peak in 2007; so does not offer much reassurance. Breakout above the quarterly high at 0.20 would be a warning sign.
VIX Index
The Nasdaq 100 broke resistance at 2800 despite bearish divergences on both 13-week Twiggs Momentum and 13-week Twiggs Money Flow. Reversal below the latest rising trendline would warn of a correction, while follow-through above 2900 would signal an advance to 3300*. Only breach of primary support at 2500 would signal a reversal.
Nasdaq 100 Index

* Target calculation: 2900 + ( 2900 – 2500 ) = 3300

Rising debt indicates consumers are once again spending. While there are still structural flaws in the US economy, the market is gaining momentum and the current advance shows no signs of ending.

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Investing: Growth and the markets | The Economist

Buttonwood of The Economist quotes Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School:

….take the records of 83 countries from 1972 to 2009 (the most comprehensive set available) and rank them by GDP growth over the previous five years. Investing each year in the countries with the highest economic growth over the preceding five years earned an annual return of 18.4%, but investing in the lowest-growth countries returned 25.1%.

Read more at Investing: Growth and the markets | The Economist.

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Philip Maymin, Why Financial Regulation is Doomed to Fail | Library of Economics and Liberty

Philip Maymin highlights a problem with volatility:

…..securities with historically low volatility tended to have almost twice as much subsequent risk, while those with historically high volatility tended to have almost half as much subsequent risk. For both the riskiest and least risky securities, therefore, historical risk is a statistical illusion.

He further points out that regulation encourages banks to act in concert, increasing systemic risk, while deposit insurance reduces the level of self-imposed discipline among banks.

Read more at Philip Maymin, Why Financial Regulation is Doomed to Fail | Library of Economics and Liberty.

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Milton Friedman – The Free Lunch myth [video]

Milton Friedman, recipient of the 1976 Nobel Prize for Economic Science, was one of the most recognizable and influential proponents of liberty and markets in the 20th century, and the leader of the Chicago School of economics. Here he gives his views on the myth of the free lunch.

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