Tag: economics

Mailvox: the inactive aspect of demand

Jed requests an explanation:

Vox, can you explain [that “not buying something is at least potentially an economic activity”]?

How is not playing baseball considered playing baseball when one is merely sitting in the stands? This only works from a socialistic standpoint which is exactly why Democrats saw no problem including it in their law.

First, the baseball analogy is a bad one. The logical error that Jed commits there is his assumption that economic activity = buying something. This is not only incorrect, since X!=not X, but indicates a failure to understand what economics is. This failure is further evidenced by the incoherent assertion that it “only works from a socialistic standpoint”, whereas the truth is that because economic concepts always work, socialism itself does not.

Now for the explanation. Recall the basic supply and demand curve. Since the demand curve is the expression of the buyers’ willingness to buy at various price points, it by definition takes into account the decisions of those who are actively choosing not to buy at a price above their buy point. They are engaging in exactly the same economic activity in not-buying that they are in buying, the only difference is that the price point happen to be above their action trigger.

This isn’t as confusing as it sounds at first. For example, no one has a hard time understanding that a woman has gone shopping even if she didn’t end up buying anything while she was out at the mall. This is why, in the introduction to RGD, I pointed out that Leonard Read’s famous story of the pencil only told half the story as “The story on the demand side is arguably even more amazing, as the myriad assignments of personal value for a pencil made by the millions of people who buy pencils and by the tens of millions who elect not to buy them are all factored into an incredibly massive but ever-changing computation that always manages to produce a definite price for every single transaction that takes place at millions of different points in the space-time continuum.”

This doesn’t mean that every non-purchase can be considered economic activity, only decisions to not make a possible purchase can. One has to be somewhere along the demand curve in order to qualify. Thus, a decision to not purchase U.S. health insurance by someone in Indonesia is not economic activity because the Indonesian is not a potential participant in that market. But the decision by individuals in Chicago or Raleigh to not purchase health insurance is economic activity because they are potential participants in the market since they would be interested in purchasing health insurance if the price fell low enough.

Now, none of this can be used to justify the Commerce Clause given the principle of non-infinity and the fact that it is supposed to be a specific exception to a restriction, not a free Federal do whatever the hell you want card. But the basic concept of the non-buyer as economic participant is a perfectly sound one.

Pat Buchanan on China and free trade

The growing power of China and the decline of an indebted America is just one small aspect of the strong historical case against free trade:

Revalue your currency, we demand of the Chinese, stop running these trade surpluses at our expense, start practicing free trade, and abandon these mercantilist and protectionist policies. But why should they? Why should China abandon a trade policy that is working marvelously well for them, and adopt a trade policy that is failing dismally for us? Does that make sense?

Why should any nation emulate the U.S. trade policy of the Bush-Clinton-Bush era that has stripped us of a third of our manufacturing jobs and made us dependent on China and the world for the needs of our national life and the borrowed money to pay for them?

Why would China, seeking to make herself an independent and self-sufficient nation, adopt a policy that cost us our independence? And what are the Chinese doing in their ascendancy to first power on earth that we did not do in ours?

One of the interesting things that readily becomes apparent when reading Rothbard’s An Economic Perspective on the History of Economic Thought is that virtually everything the free traders – and I was once one of them – believe about economic history is wrong. They have various theoretical problems too, to be sure, but history provides an easier means of undermining the primary intellectual engine for totalitarian globalism than comparatively esoteric economic theory. Of course, the weakness of the free trade case is very easily seen in the way that they immediately retreat from their previous analogies and arguments as soon as their weaknesses are demonstrated.

Regarding number seven

The final NAR prices are in.  And while it wasn’t as close as 2008, it wasn’t too far off, especially since prices did plunge below $165,000 in February before bouncing back.

“7. The national median existing-home price will not rise 4% from $172,600 to $179,500 as predicted by NAR’s lead economist Lawrence Yun, but will fall below 165k instead.”

From the article entitled 2010 weakest year for home sales since 1997:  The median price for a home sold in December was $168,800, down 1 percent from a year ago.

Krugman attacks logic, hilarity ensues

Paul Krugman inadvertantly reveals a glimpse into his reasoning process:

My wife and I were thinking of going out for an inexpensive dinner tonight. But John Boehner, the speaker of the House, says that no matter how cheap the meal may seem, it will cost thousands of dollars once you take our monthly mortgage payments into account. Wait a minute, you may say. How can our mortgage payments be a cost of going out to eat, when we’ll have to make the same payments even if we stay home? But Mr. Boehner is adamant: our mortgage is part of the cost of our meal, and to say otherwise is just a budget gimmick.

O.K., the speaker hasn’t actually weighed in on our plans for the evening. But he and his G.O.P. colleagues have lately been making exactly the nonsensical argument I’ve just described — not about tonight’s dinner, but about health care reform.

in 1997 Congress enacted a formula to determine Medicare payments to physicians. The formula was, however, flawed; it would lead to payments so low that doctors would stop accepting Medicare patients. Instead of changing the formula, however, Congress has consistently enacted one-year fixes. And Republicans claim that the estimated cost of future fixes, $208 billion over the next 10 years, should be considered a cost of health care reform.

But the same spending would still be necessary if we were to undo reform. So the G.O.P. argument here is exactly like claiming that my mortgage payments, which I’ll have to make no matter what we do tonight, are a cost of going out for dinner.

Krugman’s column is based upon three assertions. Number one, that the large divergence in the cost of a mortgage versus an inexpensive dinner is comparable to the cost of future fixes versus the total cost of health care reform. Let’s consider that one first. The average monthly mortgage payment is around $1,750. An inexpensive dinner for two is around $50. Krugman tells us the cost of fixing Medicare for 10 years is $208 billion. The CBO’s revised estimate for health care reform, which does NOT include the Medicare fix, is $1,055 billion. (The Republicans say that the total will be $2,600 billion, but we’ll go with Krugman’s favored estimate just to be fair to him.)

So, the Nobel Prize-winning economist Krugman is claiming that 1750/50=208/1055, or that 35=0.197. And you wonder why the economy is in such dire straits…

Number two, Krugman is assuming that the Medicare fix is as inevitable as a mortgage payment. But this quite clearly isn’t the case; whereas not making the mortgage payment entails losing the house, (or at least it did back when mortgage banks held legitimate title to houses and were actually willing to foreclose on properties and write off the bad loan), the possibility that doctors might elect not to see Medicare patients hardly makes increasing Medicare payments a necessity. There are other options available that don’t require spending the money, which is not the case when it comes to making mortgage payments.

Number three, Krugman declares that “the modern G.O.P. has been taken over by an ideology in which the suffering of the unfortunate isn’t a proper concern of government, and alleviating that suffering at taxpayer expense is immoral, never mind how little it costs.” But if this were actually the case, then the modern G.O.P. would simply solve the budgetary problem by not spending the $208 billion instead of insisting that it be counted as part of the cost of health care reform. Even if we ignore the fact that this is the fiscally responsible decision as well as the Constitutionally correct thing to do since Medicare is not a legitimate function of the federal government, Krugman’s failure to realize that the Republicans are not advocating this only underlines his complete logical incoherence.

Far be it from me to defend the Congressional Republicans, but for all their ill-conceived enthusiasm for illegitimate military adventures, a war on logic is not one in which they are presently engaged. It is instead Paul Krugman who is waging a public one-man crusade against it.

You might consider a new model

Mike Shedlock borrows future Fed chairwoman Janet Yellen’s economic model to extrapolate the future:

Here is a summary of what will happen based on projections of Yellen’s model:

The Fed created 3.5 million jobs.
The Fed bloated its balance sheet by $2.3 trillion to do so.
It takes $657,142.86 in balance sheet additions to create a single job.
It takes the same $2.3 trillion to lower the unemployment rate .5%
The Fed’s balance sheet will reach $18.4 trillion by the time the unemployment rate drops to 5.9%
It will take another 3.5 years to get to a “full employment” situation with an unemployment rate of 5.9%.

If Yellen’s model holds, Nate’s hyperinflationary scenario would certainly appear to be in full E-F-F-E-C-T. Of course, at that point, the Fed would own literally the entire U.S. economy, Federal debt would increase from $8 trillion to $22 trillion and the Employment-Population ratio would fall to 52.3 percent. So, I’m just going to go out on a limb and predict that it will not, in fact, hold.

Doesn’t it just fill you with confidence that the people who hold such power over the economy and your own economic well-being are so unspeakably competent?

Phantom income, real bonuses

You almost have to admire the insane insouciance of the bankers, who boldly invent fake profits in order to pay themselves gargantuan profit-shares as bonuses:

The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators. They are allowed to accrue interest on non-performing mortgages until the actual foreclosure takes place, which on average takes about 16 months.

All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a resullt, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.

That does explain the slowdown in foreclosures rather nicely, doesn’t it. This is amazing news and makes the Enron accounting look downright angelic in comparison. It’s the equivalent of Intel booking income from the sales of millions of chips, then admitting 16 months later that it never actually sold anything. And it would certainly be an incredible way to launch a startup and take it public, assuming you could get it done in 16 months.

I’ve been reading the most excellent An Austrian Perspective on the History of Economic Thought, specifically the chapter on the pre-Salamancan scholastics, and I have to admit that the medieval anti-usury arguments Rothbard criticizes are looking more and more reasonable in the light of the way modern banks have taken the core concepts of credit and interest that were originally derived from natural law and private property rights and turned them into a fraudulent and usurious monstrosity that completely defies reality, reason, and logic.

By the way, there will definitely be a future Voxiversity on Rothbard’s History. It is approximately 61.8 times more interesting and informative than AGD was.

Dynamic government, mutating law

It’s ultimately a fool’s game to put any trust in a government program because the law, especially when created and enforced by an interventionist government, is necessarily dynamic. That means that you can’t count on the rules which presently influence your decisions remaining static since the rulemakers will change them any time they believe it will benefit them to do so:

People’s retirement savings are a convenient source of revenue for governments that don’t want to reduce spending or make privatizations. As most pension schemes in Europe are organised by the state, European ministers of finance have a facilitated access to the savings accumulated there, and it is only logical that they try to get a hold of this money for their own ends. In recent weeks I have noted five such attempts: Three situations concern private personal savings; two others refer to national funds.

The most striking example is Hungary, where last month the government made the citizens an offer they could not refuse. They could either remit their individual retirement savings to the state, or lose the right to the basic state pension (but still have an obligation to pay contributions for it). In this extortionate way, the government wants to gain control over $14bn of individual retirement savings.

The Bulgarian government has come up with a similar idea. $300m of private early retirement savings was supposed to be transferred to the state pension scheme. The government gave way after trade unions protested and finally only about 20% of the original plans were implemented.

A slightly less drastic situation is developing in Poland. The government wants to transfer of 1/3 of future contributions from individual retirement accounts to the state-run social security system. Since this system does not back its liabilities with stocks or even bonds, the money taken away from the savers will go directly to the state treasury and savers will lose about $2.3bn a year. The Polish government is more generous than the Hungarian one, but only because it wants to seize just 1/3 of the future savings and also allows the citizens to keep the money accumulated so far.

The fourth example is Ireland. In 2001, the National Pension Reserve Fund was brought into existence for the purpose of supporting pensions of the Irish people in the years 2025-2050. The scheme was also supposed to provide for the pensions of some public sector employees (mainly university staff). However, in March 2009, the Irish government earmarked €4bn from this fund for rescuing banks. In November 2010, the remaining savings of €2.5bn was seized to support the bailout of the rest of the country.

The final example is France. In November, the French parliament decided to earmark €33bn from the national reserve pension fund FRR to reduce the short-term pension scheme deficit. In this way, the retirement savings intended for the years 2020-2040 will be used earlier, that is in the years 2011-2024, and the government will spend the saved up resources on other purposes.

How many more places does this have to happen before Americans begin to realize that the same thing is absolutely going to happen with their local, state, and federal pensions, as well as their entitlement programs. The fact that government officials often refer to pensions and entitlements as “sacred obligations” doesn’t mean that they won’t eliminate the payouts or grab the funds, in fact, the need to place a legally meaningless adjective in front of the noun underlines the fact that they do not consider the legal obligations to bind them in any way.

2011 economic predictions

1. U-3 unemployment will climb above 10 percent. The real unemployment rate will be much higher, but it will be masked by a decline in the Labor Force Participation rate below 64 percent. The employment-population ratio will fall below 58 percent for the first time since 1984.

2. Real GDP growth for 2011 will fall short of the 3.4 percent predicted by Goldman Sachs. It will remain positive in initial reports throughout the year, but the final quarter will eventually be revised down into negative territory. The legitimacy of GDP as a valid metric for economic growth will increasingly be called into question as the positive numbers are belied by actual conditions.

3. The 2011 federal deficit will exceed the projected $1.27 trillion despite the Republican House majority. This will likely be the result of emergency spending required for an economic or military crisis.

4. More than 230 banks will fail or be seized by the FDIC. This will represent around 1.2% of total deposits. Bank of America will be effectively nationalized to prevent it from failing.

5. TOTLL will decline below $6.3 trillion on an unadjusted basis. (Below $5.9 trillion adjusted.)

6. The two government sectors will not be able to maintain their present rate of debt expansion which presently averages around $450 billion per quarter. As the financial and household sectors continue to decline, all sectors credit market debt outstanding, (Z1), will fall below $50 trillion for the first time since 2007.

7. The national median existing-home price will fall below 160k from the present 170,600.

8. There will be a serious Euro crisis, most likely brought about by a sovereign default or a nation announcing it will be leaving the Euro. Italy is the most likely candidate.

9. One U.S. state and at least three major cities (100k population plus) will attempt to file for bankruptcy or federal bailout. (It’s unclear if states can file for bankruptcy and public employee unions will oppose the city filings.)

Bonus: Sitemeter-recorded visits to the blog will increase from 2,370,028 visitors in 2010, (197,502 per month) to 2,750,000.

You might reasonably object that these predictions are essentially the same as they were last year. And while that’s true, you should also observe that very little has substantially changed since one year ago. The downside factors have increased somewhat thanks to Europe’s problems, the growing budget deficits and the uncovering of the mass mortgage fraud, but aside from anemic G-driven GDP growth, and higher gold and stock market prices, I don’t see much that’s been added on the upside.

2010 predictions scorecard

1. The BLS will report U-3 unemployment to be in excess of 11 percent. The actual number of unemployed workers will be much higher.
U-3 is at 9.8 percent.  There are some minor shenanigans going on at the BLS, of course, as the size of the labor force is shrinking even faster than the number of employed workers, thus keeping the unemployment rate artificially low, but I factored that into my prediction.  INCORRECT.
 
2. The BEA will report real GDP to be less than 12,973 in billions of chained 2005 dollars. A “double-dip recession” will be the official description, but rumors of a “second great depression” will be increasingly heard as the evidence mounts that a single large scale economic event is taking place.

A sluggish recovery is still the story.  There are negative rumors, but of a double-dip recession, not a large-scale depression.  The most recent GDP for Q3 was reported at 13,278.5 and it’s highly unlikely that Q4 will be reported any lower.  INCORRECT.

3. The Federal budget deficit for 2010 will exceed the projected $1.17 trillion.

The 2010 deficit is presently being reported at $1.47 trillion.  CORRECT.

4. More than 200 banks will be seized by the FDIC. Their deposits will represent more than two percent of all U.S. bank deposits. 
The FDIC seized 157 banks with deposits representing 1.1 percent of all U.S. bank deposits.  INCORRECT.  

5. Commercial bank loans and leases (TOTLL) will fall below $6.3 trillion.
This one is hard to call since there were some SERIOUS statistical shenanigans, namely, an anomalous and unprecedented $452 billion increase in reported loans in one week at the end of March.  ( The average weekly change is + or – $12 billion.)  If that anomaly is removed from the equation, as I would argue it must be, TOTLL stands at $6.293 as of the December 22nd report.  If you’re wondering why I’m inclined to give myself the benefit of the doubt here, keep in mind that TOTLL has historically increased an average of 8.4% per year and would normally have been expected to end 2010 around $7.3 trillion. So, predicting not only a decline, but a sizable one of $350 billion, was a very high risk prediction.  CORRECT.
6. All sectors credit market debt outstanding, which is published in the Fed’s quarterly Z1 Flow of Funds Accounts, will fall below $52 trillion. This will mostly be the result of continued deleveraging by the financial sector, and to a lesser extent, the housing sector, which between them will decline by more than $1 trillion.
Z1 was retroactively reported at $51.9 trillion for Q1 and Q2 in the Q3 2010 report.  The financial sector credit dropped $1.2 trillion through Q3 and the housing sector declined $106 billion.  CORRECT.
7. The national median existing-home price will not rise 4% from $172,600 to $179,500 as predicted by NAR’s lead economist Lawrence Yun, but will fall below 165k instead.
NAR reported the national median existing home price at $164,600 in February 2010.  In fairness to Mr. Yun, however, it spiked to $183,000 with the end of the homebuyer’s tax credit in June before collapsing again.  The final year end report had it at $168,800. So we both got it right, but I was three times closer at the end of the year.  CORRECT.
8.  I also expect an increase in Sitemeter-recorded visits to the blog to increase from 1,942,640 in 2009, (161,887 per month) to 2,250,000, primarily as a result of an increased interest in economic matters.

Sitemeter reported 2,367,971 visitors in 2010, (197,331 per month), a 21.9 percent increase from 2009. CORRECT.

Not particularly impressive, I’m afraid, but still better than the mainstream economic prognosticators.  The Fed’s strategy of extend-and-pretend is still in effect and holding.  I don’t see it holding up through 2011 for several reasons, but I’ll take a look at what the mainstream predictions are before making my own.  I think the key thing to learn from this is that government will go to great extremes in fighting economic contractions and one cannot necessarily extrapolate limits from previous efforts.  I also think it’s important to note that although I was incorrect with regards to U-3, GDP, and FDIC seizures, I still had the general direction correct, just not the extent.  Bank seizures didn’t decline as expected, they increased, just not as much as I’d anticipated.  Real GDP did grow in chained 2005 dollars, but that was the direct result of the almost unprecedented explosion of government deficit spending and loan incentives rather than private sector growth.  And unemployment didn’t fall, it simply didn’t rise as much as I’d thought it would.

Reversion to the mean

It would appear that the Federal Reserve is beginning to wake up to the harsh reality that the power to create money through credit is not tantamount to either omnipotence or even intermediate term price supports.  It’s not what they’re saying that is interesting, as all they’re doing is stating the completely obvious.  But it is very interesting indeed that it is two economists at the Dallas Fed who are stating it in public in their Economic Letter entitled “The Fallacy of a Pain-Free Path to a Healthy Housing Market“.  They write: “Without intervention, modest home price declines could be allowed to resume until inventories clear. An analysis found that home prices increased by about 5 percentage points as a result of the combined efforts to arrest price deterioration.  Absent incentive programs and as modifications reach a saturation point, these price increases will likely be reversed in the coming years. Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices, which cannot escape the pressure exerted by oversupply.”

Speaking of stating the obvious, the “analysis” sounds like a joke.  Home prices have been around 170,000, so 5 percent is $8,500.  Coincidentally enough, the 2009 federal tax credit was $8,000.  Imagine that.  Anyhow, consider yourself warned, as housing prices should be heading down next year and the decline probably won’t be as modest as the Fed would prefer.