Westpac reports Australia’s terms of trade (for goods) weakened for the fourth consecutive quarter, down 4.2% in Q3 and 14.7% over the last four quarters.
Why the Fed should not target inflation
Scott Sumner, Professor of Economics at Bentley University, proposes that the Fed target nominal growth in GDP (“NGDP”) rather than inflation as Ben Bernanke has long advocated:
“Even he [Bernanke] must be surprised and disappointed with how poorly [inflation targeting] worked during the recent crisis.”
The primary problem, Sumner points out, is that measures of inflation are highly subjective and often inaccurate.
“The problem seems to be that, according to the Bureau of Labor Statistics, housing prices did not fall. On the contrary, their data shows housing prices actually rising between mid-2008 and mid-2009, despite one of the greatest housing market crashes in history. And prices did not rise only in nominal terms; they rose in relative terms as well, that is, faster than the overall core CPI. If we take the longer view, the Bureau of Labor Statistics finds that house prices have risen about 8 percent over the past six years, whereas the famous Case-Shiller house price index shows them falling by nearly 35 percent. That is a serious discrepancy, especially given that housing is 39 percent of core CPI……..
There are errors in the measurement of both inflation and NGDP growth. But to an important extent, the NGDP is a more objectively measured concept. The revenue earned by a computer company (which is a part of NGDP) is a fairly objective concept, whereas the price increase over time in personal computers (which is a part of the CPI) is a highly subjective concept that involves judgments about quality differences in highly dissimilar products.”
Inflation targeting also encourages policymakers to think in terms of monetary policy affecting inflation and fiscal policy affecting real growth — “a perception that is both inaccurate and potentially counterproductive”.
“Advocates like Bernanke see [inflation targeting] as a tool for stabilizing aggregate demand and, hence, reducing the severity of the business cycle. This is understandable, as demand shocks tend to cause fluctuations in both inflation and output. So a policy that avoids them should also stabilize output. I have already discussed one problem with this view: The economy might get hit by supply shocks, as when oil prices soared during the 2008 recession……..”
Linking monetary policy (and the money supply) to nominal GDP growth would offer a far more stable growth path than the present system of inflation targeting.
Global QE
Observation made by Philip Lowe, RBA Deputy Governor:
Since mid 2008, four of the world’s major central banks – the Federal Reserve, the ECB, the Bank of Japan and the Bank of England – have all expanded their balance sheets very significantly, and further increases have been announced in a couple of cases. In total, the assets of these four central banks have already increased by the equivalent of around $US5 trillion, or around 15 per cent of the combined GDP of the relevant economies. We have not seen this type of planned simultaneous very large expansion of central bank balance sheets before. So in that sense, it is very unusual, and its implications are not yet fully understood……
The Candlemakers' Petition
I was reminded of this amusing satire by Frederic Bastiat:
To the Honourable Members of the Chamber of Deputies.
(Open letter to the French Parliament originally published in 1845)Gentlemen:
You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry…….We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion, particularly because he has for that haughty island a respect that he does not show for us.
We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat…….
Bastiat goes on to argue that such an action would raise prices, boost French industry and create new jobs — arguments put forward by many politicians for increasing protectionism — while ignoring the huge burden to the consumer.
Hat tip to Matthew Yglesias. Read the full petition at bastiat.org.
Unsaving the U.S. economy | MacroScope
Gabriel Burin writes that the U.S. savings rate sank last month to its lowest since November.
“Households were only able to boost consumption in the third quarter by dipping into their savings,” said Paul Dales, senior U.S. economist at Capital Economics, after the Commerce Department release. “Faced with the prospect of major tax hikes in the New Year, however, they will soon become more cautious”……..
Chinese TV Host Says Regime Nearly Bankrupt | Epoch Times
A sobering assessment of China’s economy reported by Matthew Robertson:
Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis — on the brink of bankruptcy.
The youtube audio requires translation:
Robertson summarizes Lang’s assessment into five key points:
- The regime’s debt sits at about 36 trillion yuan (US$5.68 trillion).
- The real inflation rate is 16 percent, not 6.2 percent as claimed.
- There is serious excess capacity in the economy, and private consumption is only 30 percent of economic activity.
- Published GDP of 9 percent is also fabricated. According to Lang, GDP has contracted 10 percent.
- Taxes are too high. Last year, direct and indirect taxes on businesses amounted to 70 percent of earnings…..
via Chinese TV Host Says Regime Nearly Bankrupt | Business & Economy | China | Epoch Times.
What’s the use of economics? | Alan Kirman | vox
This column by Alan Kirman highlights the problem with macroeconomics today:
The simple question that was raised during a recent conference organised by Diane Coyle at the Bank of England was to what extent has – or should – the teaching of economics be modified in the light of the current economic crisis? The simple answer is that the economics profession is unlikely to change. Why would economists be willing to give up much of their human capital, painstakingly nurtured for over two centuries?
…….rather than making steady progress towards explaining economic phenomena professional economists have been locked into a narrow vision of the economy. We constantly make more and more sophisticated models within that vision until, as Bob Solow put it, “the uninitiated peasant is left wondering what planet he or she is on” (Solow 2006).
Five steps to fix Wall Street
Some more thoughts on the five steps former FDIC chair Sheila Bair suggested to reform the financial system.
- Break up the “too big to fail” banks
My take is that breaking up may be difficult to achieve politically, but raising capital ratios for banks above a certain threshold would discourage further growth and encourage splintering over time.
- Publicly commit to end bailouts
Just because the bailouts were profitable isn’t a good reason to give Wall Street an indefinite option to “put” its losses to the Treasury and to taxpayers.
As Joseph Stiglitz points out: the UK did a far better job of making shareholders and management suffer the consequences of their actions. Sweden in the early 1990s, similarly demanded large equity stakes in return for rescuing banks from the financial, leading some to raise capital through the markets rather than accept onerous bailout conditions.
- Cap leverage at large financial institutions
I support Barry Ritholz’ call for a maximum leverage ratio of 10. That should include off-balance sheet and derivative exposure. Currently the Fed only requires a leverage ratio of 20 (5%) for well-capitalized banks — and that excludes off-balance-sheet assets.
- End speculation in the credit derivatives market
Bair pointed out that we don’t get to buy fire insurance on someone else’s house, for a very good reason. How is speculating using credit derivatives any different?
Again Ritholz makes a good suggestion: regulate credit default swaps (CDS) as insurance products, where buyers are required to demonstrate an insurable interest.
- End the revolving door between regulators and banks
When regulators are conscious that, with one push of the door, they could end up working for the organizations they are today regulating – or vice versa – “it corrupts the mindset”
A similar revolving door corrupts the relationship between politicians and lobbyists. Enforcing lengthy “restraint of trade” periods between the two roles would restrict this.
The Keynesian Path to Fiscal Irresponsibility | Dwight R. Lee
With the ideological shift, supported by the intellectual acceptance of Keynes’s General Theory, politicians found themselves with an excuse to do what most had always wanted to do — take more money from the general public and transfer it to favored groups (or voting blocs). The benefits are invariably less than the costs, but they are visible, readily appreciated, and easily credited to politicians. Predictably, beginning in the 1930s federal spending began increasing as a share of GDP. It was about 4 percent of GDP in 1930, increased during the Great Depression and spiked to a historical high of about 47 percent during World War II. The federal government share of GDP then dropped to about 13 percent in 1948, reached a bumpy plateau in the early 1960s at slightly below to slightly above 20 percent that lasted for over 40 years, and then escalated rapidly in late 2008 to an estimated 25 percent in 2011……
The Keynesian Path to Fiscal Irresponsibility | Dwight R. Lee (pdf).
The real solution to poverty: JOBS | CIS
By Andrew Baker and Peter Saunders:
There are two ways to reduce “poverty”: increase the value of welfare benefits faster than the value of wages, or move substantial numbers of people off welfare and into full-time jobs. Anti-poverty campaigners invariably emphasise the first option and neglect the second, but the first actually undermines the second……
The real solution to poverty: J-O-B-S, J-O-B-S, J-O-B-S | The Centre for Independent Studies.