The Ever Receding Doomsday Cult Trade
For those of you who have given up on a US recession in 2008, Intrade has rolled out a contract for a US recession in 2009. A 2008 recession is still priced at around a 30% chance, with the contracts for individual quarters still implying a better than even chance that growth will be positive for every quarter this year.
Intrade has also rolled out recession contracts for Japan, Germany, the UK, France, Italy and Ireland for 2008 and 2009. Like the contracts for the US, the bids and offers suggest little real conviction behind the idea of a global recession.
Intrade is also running contracts on who will be the next leader of Australia’s federal parliamentary Liberal Party.
posted on 02 July 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 28 June 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 21 June 2008 by skirchner in Economics, Financial Markets
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Stevens versus Bernanke: What the WSJ Won’t Tell You
Another one of those laughable WSJ editorial comments:
The biggest problem in emerging economies isn’t “the credit crunch about which we hear so much . . . but inflation.” So said Glenn Stevens, Australia’s central bank governor, to a business crowd in Melbourne Friday. It’s too bad U.S. Federal Reserve Chairman Ben Bernanke wasn’t in the audience.
Unlike his Fed peer, Mr. Stevens has ruthlessly resisted inflationary pressures.
Never mind that Australia has a much more serious inflation problem than the US on most measures, none of which the WSJ sees fit to mention. The US core CPI was running at 2.4% y/y in March compared 3.5% y/y for the comparable Australian measure. If Stevens has taken a tougher rhetorical stance on inflation than Bernanke (which is by no means obvious), it is because Australia has a much more serious inflation problem. The WSJ cites Australia’s nominal cash rate as a measure of the tightness of monetary policy, but this only highlights the inflation premium built into Australian interest rates. The real cash rate, which is the more appropriate measure of the stance of monetary policy, is only around 3%.
The more significant difference between the Fed and the RBA, however, is that the Fed considers inflation too high at 2.4%. In Australia, 2.5% is the mid-point of the target range. The RBA doesn’t even aspire to beat the Fed on inflation and has the inflation outcomes to show for it.
posted on 16 June 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 14 June 2008 by skirchner in Economics, Financial Markets
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Embrace the ‘Bubble’
Business Week’s Chris Farrell, on why we should welcome so-called ‘bubbles’ in asset prices as a normal part of the functioning of a market economy:
Let’s go back to the dot-com example. What’s remarkable is just how quickly the Internet economy was established during that so-called era of fictitious value. “The conventional wisdom is that the period of exuberance during the boom period—especially 1999 and 2000—was a bubble,” writes BusinessWeek Chief Economist Michael Mandel in his book Rational Exuberance. “It carries connotations of something fragile, which was never quite real in the first place.”
But rather than a bubble, argues Mandel, the second half of the 1990s could just as easily be called an “age of exploration.” “The low cost of capital enabled risk-taking people and companies to try out lots of new ideas simultaneously, and on a large enough scale that they got a fair test,” he writes…
Bubble moralizers greatly underestimate the vital role of speculators and speculative markets in allocating resources toward an economy’s fast-growing sectors and away from stagnant industries.
posted on 13 June 2008 by skirchner in Economics, Financial Markets
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The Future Fund as Lender of Last Resort? Your Taxes at Work
Sources being quoted by Reuters suggest that Australian banks are raising term funding from the Future Fund. ANZ has supposedly raised about A$500 million this way. A Commonwealth Bank spokesman is quoted as saying that it looked at all funding options and “the Future Fund is clearly emerging as a future source of funding.”
From a capital raising and portfolio management perspective, this lending would make good commercial sense and is fairly low risk. However, it does raise some interesting issues as to whether the Future Fund may come to be seen as a de facto lender of last resort. This also may not play well politically if the perception is that taxpayers are involved in subsiding bank capital. It should make for some interesting questions at Senate estimates (hint for Coalition staff!). Future Fund Chairman David Murray has previously argued that the Future Fund would serve to lower the cost of capital for Australian business, which effectively concedes the point that the Fund is providing a more or less explicit subsidy through such lending.
posted on 12 June 2008 by skirchner in Economics, Financial Markets
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Labor’s Manufacturing Fetish
The ALP’s manufacturing fetish was evident when it was in opposition. Kevin Rudd said back in 2006 that he wanted Australia to be ‘more than a mine for China and a beach for the Japanese.’ The subsequent appointment of the left’s Kim ‘Il’ Carr as industry minister in the new government was also a bad sign. Australians will now start paying the price for this manufacturing fetish through local production of hybrid cars, one of the worst industry policy decisions in 20 years. As Henry Ergas notes:
In an economy that is pushing over-full employment, increased subsidies to assembling cars only diverts resources from more productive uses. In addition, according to recent estimates from the Productivity Commission, “more than $1 billion is redistributed each year to the automotive industry (a majority of which is foreign owned)”. The consequence is that these subsidies will attract further inputs to an industry that is already far from making productive use of scarce resources, magnifying the waste. It would have been better had Rudd and Brumby scattered the dollars on the streets of Melbourne.
posted on 12 June 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 07 June 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 31 May 2008 by skirchner in Economics, Financial Markets
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KiwiDisSaver
New Zealand Institute of Economic Research economist Trinh Le on the KiwiSaver scheme (HT: Matt Nolan):
KiwiSaver is merely a money-go-round. Over half of the savings are funded by taxpayers, in the form of the $1000 kick-start subsidy, matching contributions of up to $1040 per year and foregone tax revenue from ESCT (employer superannuation contribution tax) exemption. Most of the remaining savings are employers’ contributions and money that members would have saved in other forms.
Only 9-19 per cent of KiwiSaver balances are estimated to be from reduction in consumption.
That much “new” saving is hardly enough to cover the administration and compliance costs of implementing the scheme, and the deadweight loss due to taxation…
More on KiwiSaver from Phil Rennie at CIS.
posted on 26 May 2008 by skirchner in Economics, Financial Markets
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Where Budget Surpluses Come From
Treasury Secretary Ken Henry, in his traditional post-Budget address to ABE, points to the correct interpretation of the role of the budget in demand management:
activist counter-cyclical fiscal policy might be frustrated by lags of recognition, implementation and transmission. And its effectiveness might be compromised by Ricardian equivalence, the permanent income hypothesis or import leakages. I noted that these lags and questions of effectiveness pose real challenges for the use of counter-cyclical fiscal policy. But I also noted that they do not rule out such use.
And, obviously, they do not rule out allowing the so-called automatic stabilisers to work. That’s probably how the fiscal stance contained in this budget should be interpreted. With respect to the current year, 2007-08, the Pre-Election Economic and Fiscal Outlook (PEFO) published in the November 2007 election period estimated an underlying cash surplus of 1.3 per cent of GDP. Last week’s budget reveals parameter and other variations since PEFO that would have added $5.2 billion, or about 0.5 per cent of GDP, to the underlying cash balance. Of this, more than 0.3 per cent of GDP is additional tax revenue. Most of that upward revision to tax revenue has been ‘saved’, to achieve a 2007-08 surplus estimated now to be 1.5 per cent of GDP. For the budget year, 2008-09, the government has targeted an underlying cash balance excluding tax revenue revisions of the same proportion of GDP – that is, 1.5 per cent. Adding the revisions to tax revenue since PEFO, the estimated surplus for 2008-09 is 1.8 per cent of GDP.
See the end of Henry’s remarks for a swipe at opposition Senators.
posted on 20 May 2008 by skirchner in Economics, Financial Markets
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Sovereign Wealth Funds Summit
I will be speaking at the Sovereign Wealth Funds Summit on 26 June on the subject of ‘Sovereign Wealth Funds and Financial Markets: A Stabilising Force?’ Summit details and registration can be found here.
posted on 19 May 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 17 May 2008 by skirchner in Economics, Financial Markets
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That 70s Show
RBA Governor Glenn Stevens revisits the economics of the 1970s:
“There is much less inclination than there once was to use fiscal policy as a counter-cyclical stabilisation tool,” he told alumni of the Sydney University economics faculty last night.
Mr Stevens and his predecessor Ian Macfarlane have set little store by the use of the budget to influence inflation or rates.
Mr Stevens earlier this year said the budget should be judged for the value of the measures it contained and the sustainability of government finances.
“It shouldn’t be judged through the narrow prism of what might it mean for the overnight cash rate,” he said in January.
This does not stop the commentariat and Access Economics from living in a 1970s time-warp.
posted on 16 May 2008 by skirchner in Economics, Financial Markets
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