Tag: economics

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.

Krugman asks the question

Fresh from presenting a FIFTH Neo-Keynesian definition of inflation in the form of “core inflation”, Paul Krugman finally begins to pay attention to the actual issue at hand:

I’d like to highlight one aspect of this discussion that has been striking me: the conservative focus on the evils of increasing the money supply. You hear it all the time: the Fed is printing money! Danger, Will Robinson! In some comments on this blog I see assertions that the true measure of inflation isn’t prices, it’s what happens to the quantity of money.

Now, one thing you might immediately say is that for those who care about, know, actually buying things — you can’t eat money — it’s prices of goods that matter; and for the past three decades, as shown above, there has been remarkably little relationship between the standard monetary aggregates and the inflation rate.

But here’s an even more basic question: what is money, anyway?

As I’ve shown in the first two inflation videos on Channel Vox, it’s absurd for Krugman to talk about “the inflation rate” when he can’t settle on one single reliable definition of inflation. However, he would have been correct to say that the relationship between the standard money aggregates and those various definitions is questionable, but he ignores the fact that the monetarists utilize, (or, as it suits them, refuse to utilize) a fudge factor called “velocity” in order to explain the variances in that relationship.

About which more anon. I would have already released the third video if I hadn’t lost my voice last week. I hope to record it soon, but I doubt I’ll be able to get it down before Christmas. Regardless, I find it ironic that Austrian theory is logically strong enough that even a blind squirrel like Krugman can stumble onto the foundation of some of its definitions despite his willful ignorance of its teachings.

“The truth is that these days — with credit cards, electronic money, repo, and more all serving the purpose of medium of exchange — it’s not clear that any single number deserves to be called “the” money supply.”

Of course, Krugman still manages to miss the obvious conclusion, which is that either the inflation rate depends upon whatever metric most merits being described as the money supply or else there is no such thing as inflation. As for his statement that one can maintain a reasonable monetary policy without knowing what money actually is, one need only point to the track record of the Federal Reserve in maintaining price stability and full employment to shatter that assertion.

Supply does not create demand

The present state of Spain’s real estate market should suffice to explode that theory:

A better known real estate debacle is a sprawling development in Seseña, south of Madrid, one of Spain’s “ghost towns.” It sits in a desert surrounded by empty lots. Twelve whole blocks of brick apartment buildings, about 2,000 apartments, are empty; the rest, only partly occupied. Most of the ground floor commercial space is bricked up.

The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units — about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

At the same time, coastal villages were transformed into major residential areas for vacationing Spaniards and retired, sun-seeking northern Europeans. At its peak, the construction sector accounted for 12 percent of Spain’s gross domestic product, double the level in Britain or France.

But almost overnight, the market disappeared. Many immigrants went home. The national unemployment rate shot up to 20 percent. And the northern Europeans stopped buying, too.

A number of mainstream analysts believe that the downturn has reached its bottom and things are turning around. However, it defies reason to believe that a 12.8% decline in prices is enough to offset the preceding 500% increase, especially when the banks that financed the boom haven’t booked their existing losses from the bust yet. My suspicion is that we are getting very, very close to the end of the reactive bounce in Europe and the USA alike. All of the conventional signs of Wave 2 bullishness appear to be present now and the rejection of the omnibus spending bill indicates that Congress is not going to play along with the Fed’s plan to replace private debt and spending with public debt and spending.

Those who think the Fed can print money ad infinitum have forgotten that it requires the government to play along and take on more debt that can be monetized. While I don’t expect an actual reduction in public debt, I do expect a rate of increase that is insufficient to keep pace with the private contraction.

UPDATE: Thanks to Wikileaks, we now know that the central bankers were lying and those of us who identified the crisis as being a solvency issue rather than a liquidity problem were right all along. Notice the date of March 2008, while Bernanke was still making speeches about how the Federal Reserve would solve the liquidity problem in May.

“Monday, 17 March 2008, 18:27
C O N F I D E N T I A L LONDON 000797
SIPDIS
NOFORN
SIPDIS
EO 12958 DECL: 03/17/2018
TAGS ECON, EFIN, UK
SUBJECT: BANKING CRISIS NOW ONE OF SOLVENCY NOT LIQUIDITY
SAYS BANK OF ENGLAND GOVERNOR”

Post-WWII American power

I recently read the 2008 paper that was the foundation of Carmen Reinhart and Kenneth Rogoff’s successful book that has often kept RGD from topping the Kindle charts in the Economic History category, This Time It’s Different. It’s an interesting paper for a variety of reasons, but one thing that struck me about the following chart is the way it underlines the fact that the post-war US economic dominance was an artifact of the hardships that struck other economies as a result of the wartime devastation and wartime expenditures rather than the implementation of FDR’s New Deal as the common historical myth has it.

Notice how many countries were in default – in other words, went bankrupt – during the 1940 to 1945 period: almost 50%.  To the extent that FDR drove up the public debt to previously unseen levels and wasted productive capacity on military expenditures, he actually put the US economy at some risk.  It was a reasonable bet, however, since the Allied nations incurred tremendous debts to the USA during the war, Americans had the benefit of being a creditor nation as well as being in possession of the only industrial infrastructure that had been undamaged by the war.  The postwar economic boom was therefore inevitable, barring any injudiciously stupid actions on the part of the politicians.  

Of course, this also meant that the relative decline of American wealth was inevitable, especially given the quasi-free trade policies that have permitted other nations, who were always bound to start catching up once they shed their debts and rebuilt their infrastructures, to catch up even more quickly. 

The $52 trillion question

This is a graph of the four primary debt sectors from 2008 through Q3 2010, which between them account for 90% of the total credit market debt outstanding in the USA.  The red line represents the total of federal debt plus state and local debt; $9 trillion belongs to the federal government while $2.4 trillion is owed by the state and local governments.

So, while Z1 reports a quarterly increase of 0.43% in overall credit, the first increase after five straight negative quarters, this meager increase almost entirely consists of swapping financial sector debt for federal government sector debt.  This is consistent with what I described was likely to happen in The Return of the Great Depression and is also consistent with the Misean definition of inflation that includes credit as opposed to the Friedmanite one that does not.  The $52 trillion question is how long this debt transference process can be maintained.  If it can go on indefinitely, then there will eventually be hyperinflation.  If it cannot, there will be deflation.  High metal prices notwithstanding, I still maintain that it cannot go on indefinitely, and the fact that the Fed and the Treasury are limiting their credit expansion to approximately the level of the private sector credit contraction tends to suggest that this is the case.  Three years is impressive, but it is neither infinite nor conclusive.

I don’t deny that we have seen what looks like inflation due to the steady increase in M1 and M2.  But keep in mind that we know beyond any shadow of a doubt that the mortgage banks have not been accurately accounting for the bad debts being incurred by defaulting homeowners and that they may not even hold title to many of the homes that supposedly back  those home loans.  This means that the yellow line should be declining more rapidly than it is.  Also, we know that the insolvent nature of many of the large financial institutions means that the light blue line is going to decline dramatically once the first one fails and sets off the chain reaction that the Fed has been so desperately attempting to forestall.  Those debts are not going to be inflated away, they are going to be deleveraged through default as has been happening on a smaller $3.1 trillion scale since the 4th quarter of 2008.

Since the government now accounts for 21.8% of all debt, up from 14.6% in only 27 months, the government looks to be facing a choice between assuming ownership of all debts owed in the economy within two decades or to stop fighting the deflationary process that Austrian theory dictates is not only necessary, but inevitable.  Those looking to the historical example of the Great Depression should keep in mind that the federal government had a good deal more leeway at that time because it was not already saddled with one-fifth of the debt in the economy.  And don’t forget, this accounting doesn’t include the very large debts imposed by off-budget pension plans at the state and local level and entitlements at the federal level.

Default and devalue

Iceland shows that the arguments put forth by the banksters and the europhiles are simply incorrect:

Iceland’s real gross domestic product grew by 1.2 percent in the July-September period from the previous quarter, the first quarterly increase since the same period in 2008. Iceland entered a slump after its overleveraged financial sector collapsed in the wake of Lehman Brothers’ bankruptcy.

Like Ireland and Greece, Iceland has taken a large dose of austerity measures to rebuild its economy. Unlike Ireland and Greece, however, Iceland allowed private banks to fail, and its currency, the krona, has declined by about 46 percent against the dollar since the start of 2008.

“Excluding the financial system, the real economy is doing well,” Arsaell Valfells, a professor of business and finance at the University of Iceland, said in telephone interview. Retail spending was still shrinking, he said, but the export sector, consisting mainly of fish, aluminum and tourism, was improving.

Just as a man cannot serve two masters, a government cannot serve two economies. The USA and Europe have chosen to preserve the financial economy at the cost of the real economy. Iceland chose the opposite. Needless to say, Iceland made the wiser choice because there are a lot more people in the real economy than the financial one. More importantly, the real economy is not a parasite completely dependent upon the financial economy, which is why putting the interests of the financial economy first is bound to be disastrous when viewed from a longer term perspective.

The Fifth Definition

Paul Krugman explains why Keynesian economists have now begun to switch to a fifth definition of inflation, “core inflation”, that is distinct and increasingly distant from the Keynesian school’s theoretical, official, textbook, and practical definitions.

Since I’m taking a break from shoveling, I thought I might take a few minutes to address an issue that seems to confuse many people: the idea of core inflation. Why do we need such a concept, and how should it be measured? So: core inflation is usually measured by taking food and energy out of the price index; but there are alternative measures, like trimmed-mean and median inflation, which are getting increasing attention.

First, let me clear up a couple of misconceptions. Core inflation is not used for things like calculating cost-of-living adjustments for Social Security; those use the regular CPI.  And people who say things like “That’s a stupid concept — people have to spend money on food and gas, so they should be in your inflation measures” are missing the point. Core inflation isn’t supposed to measure the cost of living, it’s supposed to measure something else: inflation inertia….

The standard [core inflation] measure tries to do this by excluding the obviously non-inertial prices: food and energy. But are they the whole story? Of course not — and standard core measures have been behaving a bit erratically lately. Hence the growing preference among many economists for measures like medians and trimmed means, which exclude prices that move by a lot in any given month, presumably therefore isolating the prices that move sluggishly, which is what we want.

And then these great minds of the dismal science wonder why their models don’t work in either a predictive or an explanatory manner. Of course, the reason they need to keep coming up with these additional “definitions” is because not because the “measures have been behaving a bit erratically” but because the conclusions that are based on the definitions don’t line up with what is visibly taking place in the actual economy.

The red line is the standard “core inflation” CPI-FLENS measure that Krugman is citing in his second “Core Logic” post; the blue line is the standard CPI-U.  However CPI-FLENS cannot possibly measure the inflation inertia because the practical application of the various Keynesian definitions of inflation requires something to measure those price changes against.  Simply removing some of the more volatile (and generally higher) prices from the price index only smooths out the price index while tending to reduce it.  Since inflation – and therefore its inertia – depends upon the comparison of those price changes with changes in the production of goods and services, (in practical terms, with GDP minus the price increase of one’s preferred index, be it CPI-U or CPI-FLENS), anything that leaves GDP out of the equation cannot be considered the inflation inertia anymore than the mere change in prices can be considered inflation if it does not take the change in production into account.

So much for inflation

Apparently QE III is in the cards:

In an effort to thwart counterfeiting, the US Government has implemented a $100 bill design so difficult to print even the U.S. Treasury cannot print them. The government needs to burn $110 billion in flawed $100 bills, more than 10% of all existing cash. The cost of printing the flawed bills was a mere $120 million.

If inflation is derived from the money supply, then burning 10% of the the entire currency stock should cause prices to fall, right? Given the current M2 figure of $8,767 billion, this bonfire of the Franklins should result in an immediate 1.3% reduction in the rate of inflation.