Tag: economics

The tide flows out

Guess who’s naked now?

A widening gap between data and reality is distorting the government’s picture of the country’s economic health, overstating growth and productivity in ways that could affect the political debate on issues like trade, wages and job creation.

The shortcomings of the data-gathering system came through loud and clear here Friday and Saturday at a first-of-its-kind gathering of economists from academia and government determined to come up with a more accurate statistical picture.

The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country…. Grappling with these blind spots, nearly all of the 80 experts at the conference, which was sponsored by the Upjohn Institute and the National Academy of Public Administration, agreed that the statistics now published tend to overstate the strength of the economy.

If you’re only watching GDP, you are getting an increasingly inaccurate picture of the economic situation. There is no way that economic activity is growing in a credit-based economy where credit is contracting. It’s like watching a football game where the team fails to get into the end zone, but somehow racks up 28 points on the scoreboard. As I’ve shown in RGD, the variance in reports for the same quarter is not infrequently larger than the average growth reported.

It’s interesting that they should finally admit these statistical problems now, just as the gap between reported growth and reported employment is becoming apparent to the casual observer.

Double-digits

Unemployment sails over the predicted high for 2010. The ever-reliable mainstream economists were forecasting an increase to 9.9 percent… and I’d encourage you to stop and think about why they might have assumed that. Remember, Keynesian economics is all based on psychology.

Unemployment Rate Rises to 10.2 Percent
The nation’s unemployment rate rose above 10% for the first time since 1983 in October, a much worse jump than expected as employers continued to trim jobs from payrolls…. According to a survey of top forecasters by the National Association of Business Economics last month, the consensus estimate among economists was that unemployment would hit a high of 10% in the final three months of this year and the first quarter of 2010.

Expect a lot of happy talk about how unemployment is a “lagging indicator”. Anyhow, the employment-population ratio is down to 58.5 percent and U-6 is now 17.5 percent. I will be very surprised if U-3 does not exceed 12 percent in 2010.

Karl Denninger reminds us that the consensus forecast for 2009 was 8.4% and breaks it down at the Market Ticker with the help of this graph.  He’s looking primiarly at loan losses while I’m looking at declining bank credit, but the perspective is the same.

Errata

In any book full of statistical minutia, it’s highly probable that the author will make the occasional dumb mistake. Sometimes it’s a typo, sometimes it’s a failure of research, sometimes it’s a misstatement, and sometimes it’s just an inexplicable error. This doesn’t make you feel any better when you catch your own dumb mistakes, or worse, have to rely upon other people catching them for you. But this historical howler, I have to confess, makes me feel rather better about my own 1931-related error. It also may help explain my low opinion of certain mainstream economists for those who think I show insufficient lack of respect for fame and professional credentials. And while I’m inclined to give authors the benefit of the doubt when it comes to statistical citations, I’m not sure this one can be considered an excusable error, especially since it was made by an economist who has often written about the Great Depression as if he knows a great deal about it.

“Back to bank runs: in 1931, about half the banks in the United States failed. These banks were not all alike. Some were very badly run; some took excessive risks, even given what they knew before 1929; others were reasonably well, even conservatively managed. But when panic spread across the land, and depositors everywhere wanted their money immediately, none of this mattered: only banks that had been extremely conservative, that had kept what in normal times would be an excessively large share of their deposits in cash, survived.”
– Paul Krugman, The Return of Depression Economics, p. 100 (1999)

I found myself wondering if he’d figured out his tremendous mistake or if anyone had bothered to point it out to him at some point in the ten years between editions. Fortunately, I also happen to have his revised edition. The answer: apparently not.

“Back to bank runs: in 1931, about half the banks in the United States failed. These banks were not all alike. Some were very badly run; some took excessive risks, even given what they knew before 1929; others were reasonably well, even conservatively managed. But when panic spread across the land, and depositors everywhere wanted their money immediately, none of this mattered: only banks that had been extremely conservative, that had kept what in normal times would be an excessively large share of their deposits in cash, survived.”
– Paul Krugman, The Return of Depression Economics and the Crisis of 2008, pp 96-97. (2009)

If you should happen to consult RGD, you’ll see that 2,293 of the 20,367 banks in the United States failed. That’s 11 percent, which is not even close to “about half”. You can also check Banking and Monetary Statistics 1914-1941 or Friedman and Schwartz’s A Monetary History of the United States 1857-1960 if you don’t wish to take my word for it. The problem is that repeating this erroneous historical “fact” twice in ten years isn’t merely an error, it tends to suggest that Krugman really doesn’t know all that much about the Great Depression, and even worse, hasn’t read Milton Friedman.

Going academic

While my contempt for the present university system, such as it is, runs both deep and wide, I was nevertheless pleasantly surprised to be informed by a professor at a large university of his intention to make use of RGD in one of his upper-level economics courses. So, at least one group of economics majors won’t graduate without ever having heard of the Austrian School or learning about the intrinsic unreliability of macroeconomic statistics.

UPDATE – In other book-related news, a Muslim reader has informed me of his intention to translate TIA into Arabic; apparently someone has translated the first four chapters of Dawkins’s The God Delusion and he decided to see that the other side was represented. He said he’ll send me a PDF when he finishes, and I’ll post it here for download. I think it’s great, but I have to confess that it never occurred to me that the first language any of my books would be translated into would be Arabic. Go figure.

Perhaps not the best idea

It appears that a few of the less intelligent atheist ankle-biters have decided that it’s a good idea to attack my writing on economics because they find my opinions on atheism and evolution to be so distasteful. Amusingly, they have decided that my criticism of Paul Krugman proves that I don’t know anything. Because, you know, he has a Nobel Prize and all. As it happens, last night I was re-reading Krugman’s book The Accidental Theorist, published in 1999 with absolutely no perception of the tech bubble that was about to burst. Instead, he was still worried about currency crises. I rather like the book because Krugman isn’t a complete idiot, he’s just willfully ignorant and inclined to cling to his defunct Keynesian models. I intend to go through the chapters and highlight various points of interest good and bad, of which this snide slam on the supply-siders, written in the summer of 1997, is a good example of the latter.

Suppose that you had managed your personal finances based on what you heard four years ago from Newt Gingrich, read in Forbes, or for that matter saw on this very page [The Wall Street Journal]. You would have sold all your stocks and probably put your money into gold. If the supply-siders were fund managers, not only would you have fired them, you would have sued them for the lack of due diligence.

This inspired me to take a look at the prices of stocks vs gold since August 1997. Needless to say, there is a very good reason that Paul Krugman admits that he is not a successful investment forecaster.

Gold: +336% From $324.10 to $1,087.45
S&P 500: +9.5% From 954.29 to 1,045.41

And this is not even taking into account the fact that the S&P 500 of today is not the S&P 500 of 12 years ago, as mergers, bankruptcies, and shrinking market caps have caused numerous stocks to vanish. 43 changes were made in 2007 alone! Suppose that you had managed your personal finances based on what you heard 12 years ago from Paul Krugman… unfortunately, a lot of Americans basically did and went heavily into stocks and real estate instead of gold and commodities. You would have done rather better to listen to a non-laureate’s advice. And even for the five years from 1997 to 2002, you were better off with flat gold than with your stocks down 15 percent.

I somehow doubt this has caused Paul Krugman to revisit supply-side theory. Not that I subscribe to it either, but if the performance of the stock markets vs gold is your metric of comparison, well, it would appear a serious rethink is in order.

But it must be said that Krugman reaches some very worthwhile conclusions on occasion. Such as when, in the same book, he wrote what are arguably the most relevant words he has ever written: “I am always grateful when influential pundits make such statements, especially in prominent places, for in doing so they protect us from the ever-present temptation to take people seriously simply because they are influential, to imagine that widely-held views must actually make at least some sense.”

A failure of happy talk

A third stimulus plan appears to be in the works:

Commerce Secretary Gary Locke was “imprecise” when he said President Barack Obama’s advisers are considering a second stimulus measure, his spokesman said today. Locke, in an interview with Bloomberg Television, said: “If there is to be another stimulus — and that’s being hotly discussed and very seriously considered within the administration as well as members of Congress — it needs to be very targeted, very specific and we need to be very mindful of the deficit as well.”

It’s amazing how quickly they forget the $145 billion Bush stimulus plan of 2008. And, of course, the mere fact that more stimulus is being discussed despite the loud trumpeting of the “recovery” indicates that it is employment that is the true measure of economic growth rather than GDP.

Did Ron Paul read RGD or something?

It does sound rather like it:

Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.

A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954…. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?

What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years.

Or perhaps it was a book entitled The Repeat of the Great Depression. Although it really is remarkable how in sync his comments are with my conclusions in the book.

Banking Oct 2009 update

Bank failures: 115
Total Deposits: $7,566 billion
Failed Deposits: $107.2 billion
Failed Assets: $129.5 billion
Estimated Losses: $29.4 billion
Actual Losses est: $52.4 billion

Failed Deposits/Total Deposits: 1.42 percent
Estimated Losses/Failed Deposits: 27.4 percent
Actual Losses/Failed Deposits: 48.8 percent
Total loans & leases: -6.8 percent (6720.3, 10/14/09)

DIF balance Q3 reported: negative
DIF balance FDIC est: -7.7 billion
DIF balance actual est: -20.3 billion
FD/TD 1929: 0.47 percent
FD/TD 1930: 1.65 percent
FD/TD 1931: 3.60 percent
FD/TD 1932: 1.99 percent
FD/TD 1933: 8.55 percent
AL/FD 1929-1933: 25.66 percent

FD/TD 2008: 3.21 percent
AL/FD 2008: 14.99 percent

September’s figures

Falsifying RGD

I’ve been asked to consider the possibility that the thesis of my latest book, The Return of the Great Depression is incorrect. If I were the Mogambo Guru, this would of course be the correct occasion to respond with nothing more than the Mighty Mogambo Snort of Derision (MMSoD) followed by a verbose and entertaining rant involving pitchforks, firearms, indignities performed upon the corpses of deceased central bankers, and gold, but as I am merely an Internet Superintelligence with a tendency to take things literally even when they are clearly intended as metaphor, sarcasm, or irony, sometimes for the purposes of illustration but more often for my own amusement, I shall consider the question of what would indicate that I am incorrect and we are not in the early stages of a massive worldwide economic contraction.

As it happens, I have gone into some detail in examining the possibility that I am wrong in the book itself by cataloging the six plausible scenarios, five of which are presently part of the present economic discourse. While the five scenarios that range from Saint Bernanke and the Green Shoots to Great Depression 2.0 each have their public advocates who are listed by the scenario they are forecasting, I have yet to discover any economist who is genuinely convinced that we are headed for the sixth scenario: Fallout 4 Live.

Since a significant part of my conclusions are based on Austrian theory with a much-lesser nod to Minsky’s financial instability hypothesis, the first indication that I could be wrong is related to bank credit. Austrian theory teaches that either the money supply and/or bank credit has to contract; as Mises puts it: “[T]he moment must eventually come when no further extension of the circulation of fiduciary media is possible.” So, an sustained increase in either TOTLL or total credit market debt would be the first and strongest sign that either a) the depression is coming to an end or b) Whiskey Zulu India, the hyperinflation scenario, is coming to pass. TOTLL is presently down 8.2% from its peak one year ago, while TCMD was very slightly down in the second quarter; we are still waiting for the third quarter results.

The second sign will be rising property tax revenues, particularly at the state and local level. While it is easy for governments to play games with statistics, it is much more difficult for them to falsify their tax revenues. The document “State Finance in the Great Depression” is useful on this score. “After the Depression began, local government property tax collections did not again reach the 1927 level until 1944. For states, it took until 1952 to reach the 1927 level, although in the interval, states had reduced their reliance upon the tax.” Since state and local governments now already derive their revenue from a much broader range of taxes, it is unclear if one can use aggregate tax revenues as a similar indicator, but the collapse in cumulative tax revenues from declines in sales and income taxes suggests that this may be the case.

“Among the worst cases is Indiana where revenue collections were 8 percent below forecast, or $254 million lower than expected, leading state budget officials to speculate revenue could fall $1 billion by the end of the fiscal year.”

Most economists will be looking primarily at the GDP figures, and indeed, a positive report above three percent will probably be widely cited as evidence that the recovery has arrived, although anything south of the 3.3% growth expected by the mainstream consensus will likely sink the markets. But the current numbers are considerably juiced by the summer housing and automotive subsidies and the “positive” aspects of the improvement from the second quarter were entirely the result of a) government spending, and b) Americans buying fewer imports, neither of which is a legitimate sign of economic growth. But, I would regard two quarters of economic growth of four percent growth without any substantial government programs propping up consumer spending to be a legitimate sign of recovery. The fact that it is looking increasingly likely that the home buyer’s credit act will now be extended to April 2010 does not inspire great confidence in the legitimacy of the GDP numbers for the third and fourth quarters. I will be analyzing the Q3 Advance report on the RGD blog later for those who happen to be interested. (UPDATE: the BEA is reporting 3.5% growth for Q3, of which almost half, 1.7%, is from “motor vehicle output”. In other words, from additional government-subsidized debt.)

Finally, it is important to remember that GDP is an artificial construct intended to provide a means of modelling Keynes’s general theory which is predicated first and foremost on employment. The very concept of a “jobless recovery” is a contradiction in economic terms. As with GDP, U3 and U6 are subject to government statistical shenanigans, but unemployment is a little harder to disguise, so regardless of how the BLS plays around with the consistency of the “labor force” in order to make the rate look lower, seeing the Employment/Population ratio move back above the 60% would also be a strong sign of genuine economic recovery. Note that we are presently at 1984 rates of employment-to-population.

A fifth indicator that I am incorrect and the hyperinflationary scenario is unfolding instead of the debt-deflationary one is a rapid increase in the price of gold. Please note that this is not an economic recovery scenario, it is only a different form of the massively contractionary one. I believe that gold, being a form of money, can benefit from deflation. So, $1,075 gold is not conclusive, especially since it’s still lower than the $1,425 inflation-corrected 1981 peak. But only inflation could possibly account for the sort of rapid rise in price that would be projected to take it above, say, $5,000 per ounce, and if there is hyperinflation, the gold price can safely be expected to exceed that by a considerable margin.

Finally, physical shipments of goods are a necessary and relatively objective measure of economic activity. The Baltic Dry Index is a daily average of international shipping prices and it was at 11,771 at its peak in 2008. It is presently below 3,000 but rose as high as 4,291 in May, so any move above 5,000 would be an initial indication that an economic recovery is underway. Above 10,000 would appear to be positive proof that the economy was completely back on track, barring the hyperinflationary scenario, of course.

In summary: 1) Increasing bank credit and overall debt. 2) Rising state and local property tax revenues. Possibly increasing aggregate tax revenues as well. 3) Consecutive quarters featuring four-percent plus GDP gains not created by government spending, reduced imports and consumer spending subsidies. 4) Employment to population ratio over 60 percent. 5) Rapidly increasing price of gold over $1,500 per ounce. 6) The Baltic Dry Index exceeding 5,000. If anyone else has any suggestions, please feel free to list them.

A perfect picture

The end of the March bear market rally appears to be approaching confirmation. That’s a perfect picture of an A-B-C corrective wave.  Mike Shedlock goes into more detail, whereas I will merely note that the S&P500 is right smack in the middle of the 1,000 to 1,100 mark that Bob Prechter anticipated would be an excellent shorting opportunity back in July.