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April 29, 2006
Odds And Ends -- April 30 Edition
A busy week kept me from my appointed blog reading, and a vacation Sunday gives me the opportunity to recoup. The things I found:
The economic news of the week skewed optimistic, but was still not universally loved. Bizzyblog pronounces the advance 1st Quarter GDP report "very good news." Voluntary Exchange grades it a "high B." The Skeptical Speculator stamps the report "about as good as expected." But Barry Ritholtz says "use some common sense" and average '05 quarter 4 and '06 quarter 1 to get the big picture. William Polley also looks at the last two quarters and opines "acceptable but not breaking any records."(On the point of looking over the course of several quarters, there is an interesting picture at Economist's View on the seasonal pattern of GDP growth.) Jim Hamilton likes what he sees in the investment and export stats, but doubts that the rest of the year will be as "rosy." pgl takes some comfort in the recent path of government spending (but remains, I think, a rather grumpy Bear with respect to the longer-term prognosis). Andrew Samwick agrees it's a very good number, but frets about the low personal saving rate. Calculated Risk proposes that the trade deficit may bring downward revisions. I think Brad Setser would agree. And Mike Shedlock is the least impressed of all. Well, he and Mr. Naybob.
The canary watch continues in the real estate markets. Calculated Risk does its usual exemplary work on rounding up all the news you need to know about developments in residential housing: On existing home sales, on mortgage applications and rates, on new home sales (here and here)
No surprise that much of the week's focus was on energy prices of all sorts, and Econbrowser remains the gold standard for discussion on the topic. You will find there an explanation of how supply-and-demand and speculation are part of the same process -- a topic on which Arnold Kling shares some thoughts -- and a defense of (some of) President Bush's energy-related policy proposals. Also on the policy front, Greg Mankiw dissects the suddenly popular $100 rebate plan, and makes the case for a gasoline or carbon tax. Andrew Chamberlain dumps on the windfall profits tax. Lynne Kiesling wants Congress to take this test. Sun Bin thinks nuclear.
There was, in fact, much help to be found in sorting out the supply and demand basics of the energy situation. Although I don't endorse the name-calling, Captain Capitalism has a demand-side story to tell, in pictures. On the supply side, Steve Reardon observes that Nigeria is a problem. David. K Smith makes that point too, while itemizing the various supply and demand components of the oil-price story. Hispanic Pundit concurs: "It's as simple as supply vs. demand." You can find a lesson on how demand and supply works at Angry Bear. At Cafe Hayek and at The Commons Blog, there is more on the market in action. However, the Dallas Fed (via Mark Thoma) sees market interference in action. All of which is why Tim Schilling sees the oil price story as a prime opportunity to teach about how prices work.
Ther's more: Mike Moffat explores the connection between oil prices and the value of the dollar. Daniel Drezner asks "What Is So Special About Gas Prices?", and Jane Galt attempts to answer. Also at Asymmetrical Information, readers weigh in on three questions about the price of oil. Arnold Kling (in an exasperated tone) asks three really important questions about energy policy. (Aside: Drezner links to a Forbes article pointing out that "energy is an increasingly less important component to the American consumer." True -- Phil Miller has the picture -- but as I once noted, the share of GDP that we have to import has not fallen along with relative energy usage.) If you want to know how big a bite gas prices are compared to your brethren in other states, Environmental Economics has the map for you. Tim Iacono has last Monday's California SUV Fill Up Index, which may be obsolete by now.
Other trade/global-economy items: Don Boudreaux says worry about the fiscal deficit, not the trade deficit. (He takes on Paul Krugman on the issue as well.) On the other hand, Menzie Chinn wants you to know that, according to his calculations, the fiscal and trade deficits are connected. (While you are there, be sure to check out his post on new research on the sources of current account deficits.) Brad Setser offer his latest thoughts on dark matter. You might also detect bit of dark matter reasoning from the Bank of England's Monetary Policy Council, posted at the New Economist. Daniel Drezner reports that the U.S. Labor Department has decided to extend Trade Adjustment Assistance to service-sector workers who's jobs have been offshored -- more of whom will be in need, according to this post at Outsourcing Timers. Martin Feldstein (tip o' bowler to Mark Thoma) wants to see dollar depreciation. Simon World updates the progress on the Chinese march (or stroll, depending on your point of view) toward capital-control liberalization. See also William Polley's discussion of this point. While I am thanking MT, I'll add a gracias for this interview on the economics of immigration.
And even more on globalization and trade: John Irons promotes (apparently via Brad DeLong) a terrific review of Thomas Friedman's The World is Flat, from UCLA's Ed Leamer. (It's a very worthwhile 58 pages, but here is the short version: The world ain't flat, its small.) Mark Thoma channels economists Paul Krugman and Maurice Obstfeld, who provide their own presentation of some of the trade theory in the Leamer piece. Truck and Barter summarizes what looks like an interesting Scientific American article on globalization and poverty. (My quick take -- it's a good thing.)
Chairman Bernanke's testimony to the Joint Economic Committee received a fair amount of attention. At The Big Picture, the assessment was "the Fed is now more likely to stop at 5.0% than I previously believed," (which TBP is not putting into the good-thing category). Mark Thoma is of the same mind on the taking-a-break probability, and Tim Duy agrees that "Bernanke & Co. want to pause." But The Capital Spectator hears "no promises," and William Polley thinks the comments "a necessary step to pave the way for a pause, but not sufficient to guarantee that it will come in any definite time frame." Daniel Gross complains "Hear no inflation, see no inflation, speak no inflation". Calculated Risk highlights the Chairman's comments on the housing market ("most likely ... a gradual cooling rather than a sharp slowdown"). CR has items on both scenarios, here and here, and Daniel Gross has more. Environmental Economics notices BB's comments on energy prices (" Unfortunately there's nothing, really, that can be done that's going to affect energy prices or gasoline prices in the very short run.") John Irons points out Mr. Bernanke's skepticism about the proposition that tax cuts raise revenues.
Elsewhere on taxes: John Irons makes his case for comprehensive tax reform (though ends, I think, with some fairly modest proposals). Don Boudreaux suggests that maybe we ought to spend more time thinking about simplifying the tax system than worrying about high gasoline prices. Tax Policy Blog wishes you a Happy Tax Freedom Day. Dr. Eamonn Butler "celebrates" in the UK as well.
Worthy of notice:
As an antidote to Martin Wolf's contention that the "normal link between productivity and real earnings is broken," Gary Becker argues that rising earnings inequality in the United States is a symptom of productivity gains (though one that highlights the need to answer the vital question of why gains from human capital development are not more widely exploited). For a global perspective on the distribution of income, check out this post at Economist's View. For the theory piece of that conversation, EV has this post.
Edward Hugh notices that the "French Shop As Germans Save."
Mark Thoma reviews Martin Feldstein's review of the Economic Report of the President.
Greg Mankiw shares his opinions on the minimum wage.
Many have noted the passing of John Kenneth Galbraith. The Glittering Eye collects some of the reactions. Tyler Cowen bids adieu (or see you later, depending on what you believe about these things) to Jane Jacobs.
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April 27, 2006
Wanna See Some More Data Dependence?
Given the rash of news this week suggesting that the U.S. economy just keeps on truckin' -- The Skeptical Speculator has the round-up here and here -- I couldn't resist this special edition of the Carlson-Craig-Melick estimates of market expectations for the June meeting of the Federal Open Market Committee:
If you are new to this, you can read about the Carlson-Craig-Melick estimates in this paper:
If you're an old pro, here's the data:
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April 26, 2006
China (Et Al) To G7: Thanks For The Input
The US dollar strengthened against Asian currencies for a second straight day in European morning trade on Wednesday amid further signs that Asian nations are unwilling to play ball with the G7 group of major industrial countries.
Most Asian currencies rallied on Monday after the G7 reiterated its call for emerging Asia to allow greater currency flexibility in order to help reduce global economic imbalances, principally the vast US current account deficit.
However Asian currencies handed back some of these gains on Tuesday as a swathe of regional nations intervened either verbally or physically to stem currency strength, and the trend continued on Wednesday.
The Chinese renminbi, the prime target of the G7’s ire and heavily managed by Beijing, ended exchange trading a fraction lower at Rmb8.0175 to the dollar. Indeed, the currency has actually now weakened during April, having started the month at Rmb8.0155 to the dollar, despite the greenback’s weakness against currencies such as the euro, yen and South Korean won this month.
Verbal intervention also raised its head with Zhang Tao, deputy director general of the People’s Bank’s research department, saying that “we need to be very cautious about large fluctuations in the exchange rate”.
Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ, commented: “These developments suggest little prospect of the Chinese authorities adhering to the calls from G7 to allow greater flexibility.
“The price action is a clear indication that the Chinese authorities are not yet strictly managing the renminbi against a basket of currencies.”
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Central Banks: Independent And Unaccountable?
This, from today's Wall Street Journal's opinion page, caught my eye:
Paul Pillar, another former CIA analyst well known for opposing Mr. Bush while he was at Langley... recently wrote in Foreign Affairs that the intelligence community should be treated like the Federal Reserve and have independent political status. In other words, the intelligence community should be a sort of clerisy accountable to no one.
Geez. Was it really necessary to drag the Fed into this? I have no dog in the fight over the appropriate responsibilities of the intelligence community in relation to the executive branch (or at least none I'm willing to unleash on this weblog). But on that Fed thing, let me just note that being independent is not the same thing as being unaccountable. Here's a little help on the issue, from B.W. Fraser, former Governor of the Reserve Bank of Australia:
‘Independence’ in this context means the freedom of central banks to pursue monetary policies which are not dictated by political considerations. It does not preclude Ministers from commenting on monetary policies, and it does not preclude central banks from consulting with the government on monetary and other policies.
In general, central banks should be accountable for achieving the goals specified for them in their charters, and they should be accountable to the parliament, as representatives of the public. Other bodies – such as the media and the financial markets – will also take it upon themselves to pass judgments upon monetary policy; they are entitled to do that...
Central banks should be accountable in terms of their charters, but they can express their accountability in different ways. In New Zealand, the Governor reports on progress in achieving the government’s very specific inflation target. In the United States, the Chairman of the Federal Reserve is obliged by the Humphrey-Hawkins Act to testify before Congress several times a year. In the United Kingdom, the Bank of England now publishes a Quarterly Inflation Report as part of its endeavours to be more accountable
In Australia, the Reserve Bank engages in the usual practices of regular public speeches, quarterly articles and annual reports, and testimony before parliament. In addition, and unlike some other central banks, it issues relatively detailed press statements at the time of each change in interest rates, both to announce the change and to explain the reasons for it. This serves to increase the transparency of the monetary policy process and helps to avoid confusion in the market place. More generally, by reducing the mystique surrounding the process and clarifying the central bank’s role in it, this transparency serves not only to increase accountability but also independence.
That was written in 1994, and some things have changed since -- the creation of the ECB, institutional changes in the Bank of England, the introduction of new legislation in the United States to take the place of the expired Humphrey-Hawkins legislation, to name a few. But all of those changes are yet more examples of Fraser's central point that independence and accountability are not incompatible. Quite the opposite -- the latter is a precondition for the former:
If central banks are to be independent of the government, then they must be accountable for their actions. Not only is this proper in a well run society, but public accountability can help to preserve the independence of central banks.
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April 25, 2006
The G7 Finds A Job For The IMF
Last Friday's Wall Street Journal (page A1 in the print edition) contained an article that I'm sure had people all over the world reaching for their violins. The headline really said all you need to know:
Booming Economy Leaves the IMF Groping for Mission
With Fewer Global Deadbeats, The Agency Loses Clout, And a Source of Income
Having seen the futility of trying to browbeat China into accepting a stronger currency, the Group of Seven industrial nations has decided to outsource the task.
The job has now gone to the International Monetary Fund. Or so it appears from the G-7 finance ministers' statement at the end of their recently concluded meeting in Washington.
In their April 21 statement, the G-7 finance ministers reiterated that ``greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China.''
In the same breath, the ministers vowed to "support a new remit for bilateral and multilateral surveillance by the IMF'' and added that "an ad hoc quota increase would help better to reflect members' international economic weight.''
Surveillance, at its core, is all about the IMF using its unique mandate to monitor economic policies of member countries and imposing its will on any nation that is endangering global financial stability...
One of [U.S. Treasury's undersecretary of international affairs Tim] Adams's proposals was for the Fund to hold "special consultations'' with countries whose exchange rates were found to be grossly misaligned. The IMF has tried such consultations, a euphemism for organized arm-twisting, only twice in its history - - with Sweden in 1982 and South Korea in 1987.
John Williamson, a senior fellow at the Institute for International Economics in Washington, has made a case for the IMF to publish reference exchange rates for its member economies. Along with internationally accepted rules on the purchase and sale of foreign currencies by central banks, the reference rates are supposed to force countries with skewed exchange rates toward the equilibrium.
I suppose that, in a twisted sort of way, this would move the IMF back toward its original mandate. But is this really a good idea?
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The Tea Leaves, According To The Wall Street Journal
Christopher Conkey reveals (on page A2 of yesterday's print edition) how you too can divine the economic future:
Here is a guide to five telling indicators that will give early signals on the economy's direction.
Orders for capital goods
On Wednesday, the Commerce Department will release figures on new orders for durable goods -- items like turbines, computers and dishwashers that are meant to last at least three years. The headline number gets distorted by the volatile aircraft sector, so economists look to orders for nondefense capital goods excluding aircraft, or "core capital goods," to gauge how much equipment companies will buy in the near future.
A few months of upward movement is a good omen, suggesting manufacturers are confident enough to invest in expansion...
In a prelude to the robust growth in the first quarter, orders for core capital goods rose 6.2% between September and January. Orders were flat in January and fell 0.8% in February... Because it is impossible to spot a trend in one week, economists track the "four-week moving average" of claims...
The National Association of Home Builders/Wells Fargo monthly housing-market index gauges builders' attitudes about the climate for new-home sales..
NAHB readings above 50 mean the outlook is positive, and below 50 suggest times are tough. The index topped at 72 in June 2005, accurately predicting the peak in new-home sales the following month, and has declined steadily to 50. That is the lowest level in a decade, except for a brief period after the 9/11 attacks. David Seiders, the builders' chief economist, expects the index to decline further but to remain above 40.
The Commerce Department's monthly retail-sales report is an important signpost of consumer spending...
The bond market
After stubbornly refusing to respond to the Fed's increases in short-term interest rates, the bond market has pushed the yield on the benchmark 10-year Treasury note above 5%, the highest in nearly four years. While that creates opportunities for investors, it raises borrowing costs for businesses and pushes up mortgage rates. That, in turn, could damp growth prospects.
Oh, man. I was almost with him all the way. That last bit violates one of Dave's five key lessons from macroeconomics: Prices -- in this case, interest rates -- are what they are, neither good nor bad in and of themselves. It makes no sense to say that interest rates rising, and then to infer that this is a positive or negative for the economy as a whole (as opposed, perhaps, to particular sectors). The key question is "why are interest rates rising?".
I have for some time held that the housing market boom has in large part been a relatively passive response to low real interest rates driven by relatively weak investment demand in the US (with an appeal to the now well-traveled global savings-glut/investment-bust story). As business fixed investment and commercial real estate spending in the US turns around, we should anticipate rising interest rates, and another passive response in the residential housing market, this time in the direction of slowing. If that is the pattern that actually emerges, I am not convinced that slowdowns in home-building, home-buying, and home prices are harbingers of bad stuff to come.
UPDATE: On that interest rate point, note this, from Bloomberg:
German business confidence unexpectedly climbed to a 15-year high in April as growth in Europe's largest economy accelerated, prompting investors to increase bets on higher interest rates.
The article points to the ECB as the likely source of the higher interest rates, but we know better.
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April 24, 2006
5-1/4 By June: Back To Even Money
Well, almost. After taking a dive on triple-threat Tuesday, the estimated probability of at least two more quarter-point hikes in the federal funds rate made something of a comeback:
No surprise -- May is still a done deal (or so says the market):
The data and such:
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April 21, 2006
Dollar Diversification In Sweden
The US dollar fell against the euro in European morning trade on Friday as Sweden’s central bank said it had slashed its dollar holdings almost in half.
The Riksbank revealed that it had cut the proportion of dollars in its reserves from 37 to 20 per cent, as well as selling off all its holdings of yen, which previously amounted to 8 per cent of its reserves.
The central bank balanced these disposals by increasing its holdings of euros from 37 to 50 per cent, as well as building a new Norwegian krone position of 10 per cent...
"Today’s announcement will merely add to market fears that the end to the Federal Reserve tightening cycle will encourage more diversification away from the dollar, and into the most liquid alternative of the euro,” said Chris Turner, head of FX strategy research at ING Financial Markets, who reiterated its view that the euro will return to $1.35 by the end of the year.
$1.35. Write that one down.
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April 20, 2006
We Are The World, And We Never Had It So Good
The global economy is moving ahead at a healthy clip, with almost every country posting positive economic growth this year, according to an International Monetary Fund report.
Despite soaring oil prices, just three of the 184 IMF member nations are expected to see their economies shrink this year -- Equatorial Guinea, the Seychelles and Zimbabwe. The world as a whole will top 4% growth for the fourth-consecutive year, the IMF predicted in its twice-yearly World Economic Outlook. This year's growth may reach 4.9%, the report said.
"It would be fair to say to the world, 'You've never had it so good,'" IMF chief economist Raghuram Rajan told journalists at the report's release yesterday.
Well, David Farrar is not that happy, and Rajan does suggest that it may be best if you step away from the punchbowl, especially if you are an American:
Mr. Rajan said the IMF's primary concern is that world leaders aren't taking advantage of this happy economic moment to adopt the tough measures that would be even harder to sell should the global economy slow down. Failure to deal with the massive trade imbalances increases the possibility that currencies will adjust suddenly -- the dollar might plunge, for instance -- causing a spike in interest rates and a screeching slowdown in economic growth.
To prevent such an event, Mr. Rajan advised, the U.S. should increase its national savings -- code for cutting the federal budget deficit more aggressively than the Bush administration has so far indicated it plans to attempt.
If that isn't exactly novel advice, neither is this:
China, which runs an enormous trade surplus with the U.S., should allow the yuan to rise against the dollar, the IMF said, and create conditions that will encourage Chinese citizens and businesses to spend their earnings, creating a larger market for American goods and services. Other Asian nations that keep their currencies artificially weak against the dollar should do the same, the IMF said.
Repetitive, of course, doesn't necessarily mean wrong.
UPDATE: The IMF report is here.
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» World Growth from voluntaryXchange
The IMF reports that the real economic growth rate will average over 4% worldwide for the 4th consecutive year. Such a high average for so long is unprecedented. Sharp people will also recognize that this is part of the reason [Read More]
Tracked on Apr 25, 2006 3:16:59 AM
Declaring War On Inflation
Nope, not here. From Euractiv:
Jürgen Stark, the candidate for a vacant post on the European Central Bank's executive board, has presented himself to Parliament as a tough inflation fighter and critic of member states' monetary policy...
In a statement sent to members of the Parliament's Economic and Monetary Affairs Committee prior to his 18 April 2006 hearing, Stark declared the "war on inflation" as his top priority.
Stark said, however, that this does not mean the ECB will have to raise interest rates: "There is no automatic process of reaction."
One of those things is what the Committee wanted to hear:
Following Stark's presentation, the ECON committee voted in favour of his nomination. The vote has to be confirmed by the Parliament's Plenary before Stark may replace Issing, who will withdraw from the post at the end of May 2006.
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