Gold Bug Myths
With the USD price of gold at its highest levels since the late 1980s, Stephen Jen reviews some stylised facts about gold:
1. Stocks overwhelm flows. What sets gold apart from other commodities, besides being ‘non-destructible’ and ‘homogeneous’, is the above-ground stocks are massive (153,000 tonnes as of 2004), relative to the annual newly mined supply (2,464 tonnes in 2004). This means the holders, not the producers, of gold have market power.
2. Gold has not been a good inflation hedge. The real price of gold has declined by 50% since 1983. To keep pace with inflation since 1983, gold should be trading at US$930 an ounce — about twice the current market price.
3. Gold has a low to negative correlation with stock prices, and low general correlation with the business cycle.
The Dow/gold ratio, or the number of ounces of gold required to buy the DJIA, has been trending higher for over a century (putting aside the 1979-80 episode), yet gold bugs typically view this as indicative of overvaluation in stocks rather than an argument against holding gold.
posted on 08 October 2005 by skirchner in Economics
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Peter Costello and the Attack of the Stone, Episode IV
Former Treasury Secretary John Stone, doing what he does best - taunting Treasurer Costello:
In his latest essay to establish statesman’s credentials, federal Treasurer Peter Costello has crassly criticised (in an interview with The Australian Financial Review) the tax-cutting policies of President George W. Bush…
Costello’s remarks are all the more extraordinary for having been made a few days after a truly excellent speech by the governor of our Reserve Bank, Ian Macfarlane. His closely argued and analytically compelling address demonstrated to anyone willing to read it with a mind not poisoned by anti-Americanism that, so far from being a threat to world financial and economic stability, the US deficits (budgetary and current account) are the response we might hope for in a world the rest of which (Japan, China, other parts of East Asia, Middle East oil producers) is running a huge surplus of savings over investment.
Had Costello not read the governor’s speech before unburdening himself of his second-hand musings to the AFR? Or had he read it but simply not understood it?
With momentum building for genuine tax reform (including significant tax cuts) in next year’s budget, Costello runs the risk of being the only senior Liberal still convinced that the Government knows better how to spend our money than we do ourselves. With any luck, though, by then he won’t be making the decisions.
Costello must be truly thankful for Ken Henry.
posted on 07 October 2005 by skirchner in Economics
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The Doomsday Cult Takes a Bath
Market pricing has been particularly unkind in recent days to those who have participated in what one fund manager has called a ‘doomsday cult,’ the perverse tendency of many commentators to forecast a massive current account-related shake out in the USD and USD-denominated asset markets. The cult has some surprising members, not least the Chairman of the Australian Stock Exchange, who at last week’s ASX shareholder AGM had this to say:
America has long been living on borrowed money and its economy is on borrowed time. Unprecedented fiscal and monetary stimulus has provided the sunshine, but all the while costs have been steadily mounting. The balance of payments deficits have been climbing and unsustainable budget deficits have been scarcely contained…In the process the United States has become the world’s largest deficit country and debtor. We are in uncharted waters, so it is difficult to know how this situation will play out. However, at some time in the foreseeable future it would seem some form of global rebalancing is inevitable.
The Chairman is partly just talking his book, trying to promote Australian equities to investors, but his comments show how pervasive the cult has become.
What sets cult members apart is their conviction that this ‘rebalancing’ process must be disorderly rather than smooth. Those who think this process must be disorderly face the burden of explaining why markets are not already adequately pricing these risks. It is not enough simply to claim that markets are irrational. Some account of market inefficiency is required to explain this mispricing, particularly if these risks are as obvious as many claim.
Instead of relying on the standard cop out that markets are irrational, some cult members invoke the risk of an adverse shock that brings about a disorderly adjustment, including a flight of capital to countries with strong net international investment positions. Such adverse shocks are always possible, but it seems strange to predicate a forecast on such an asymmetric view of the distribution of these shocks. Positive shocks are just as likely, or at least, shocks that may be negative for non-USD asset markets.
Perhaps the biggest assumption of cult members is that a significant rebalancing of international investment flows is even necessary. RBA Governor Macfarlane’s recent speech on the subject (see below) poses some interesting challenges to that view.
posted on 04 October 2005 by skirchner in Economics
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‘Why I’m Not an Austrian Economist’
I sometimes get labelled an Austrian School economist, but regular readers will be aware that I’m also very critical of ham-fisted attempts at applying Austrian theories of the business cycle to current economic and financial conditions, not least because they ignore important facts about central bank operating procedures. Surprisingly, a lot of economic commentary is explicitly organised around a very similar interpretation of the business cycle as being driven by some vaguely defined notion of liquidity that is assumed to be an entirely exogenous function of monetary policy decisions, rather than an endogenous and largely market-driven response to economic conditions.
The main contribution of Austrian economics is in understanding the role and functioning of markets, something that mainstream economics and finance has lost sight of. Important as these insights are, they only get you so far. Jack Strocchi has pointed me in the direction of Bryan Caplan’s ‘Why I’m Not an Austrian Economist,’ which neatly summarises some of my reservations about Austrian economics in practice. Caplan hits the nail on the head when he notes:
Yet all too large a fraction of Austrian research has not been in economics at all, but rather in meta-economics: philosophy, methodology, and history of thought…Neoclassical economists go too far by purging meta-economics almost entirely, but there is certainly a reason to be suspicious of scholars who talk about economics without ever doing it.
posted on 03 October 2005 by skirchner in Economics
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RBA Governor Macfarlane on Global Imbalances
The 34th Conference of Economists in Melbourne was one of the better ones held in recent years. It was great to meet some IE readers for the first time, as well as catching up with some old friends. RBA Governor Macfarlane gave another great speech on global imbalances at one of the satellite business symposia, which neatly debunks much of the popular commentary on this subject:
My view is only that we should not start our analysis with the US current account, or look to its remediation as the key to unwinding the imbalances. For example, the most commonly heard prescription is for the United States to reduce its call on world savings by reducing its fiscal deficit. However, if my analysis is correct, a reduction in the US fiscal deficit by itself would be unlikely to have a major impact on international imbalances. In the absence of policy changes in Asia, the Asian countries would be likely to continue running surpluses, and so a fiscal contraction in the United States would only add a contractionary influence to a global economy already characterised by surplus saving and unusually low interest rates.
Another view that has recently been put is that it was excessively loose monetary policy rather than saving/investment imbalances that was at the heart of the problem. This view is generally bolstered by some reference to excessive liquidity, although the concept is left undefined. I do not find this argument at all convincing. There is no doubt that world interest rates have been exceptionally low, but does that of itself mean that monetary policy has been exceptionally loose? To maintain this view, you would have to believe, for example, that monetary policy in Japan and Europe , where there has been weak demand growth and negligible inflation for a number of years, should have been tightened, i.e. European and Japanese interest rates should have been raised. This would make no sense. The low level of interest rates in most developed countries is not the first cause of the global imbalances, it is the result of them.
posted on 28 September 2005 by skirchner in Economics
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Affiliate News - Laissez Faire Books 15% Off Everything Sale
Laissez-Faire Books has a 15% off everything sale through to 15 October. LFB claim to be 30% cheaper on average than Amazon and offer to match Amazon prices on available titles.
posted on 24 September 2005 by skirchner in Misc
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Conference of Economists
I will be attending next week’s Conference of Economists in Melbourne and giving a paper on Japanese Monetary Policy under Quantitative Easing: Neo-Wicksellian versus Monetarist Interpretations (the full list of conference papers can be found here). My paper is scheduled for the Monetary Policy session kicking-off at 11:15am Monday in the Old Arts Theatre.
Looking forward to catching-up with IE readers at the conference.
posted on 22 September 2005 by skirchner in Economics
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Moscow on the Molonglo
Max Corden calls for the de-Stalinisation of higher education in his Sir Leslie Melville Lecture. I seem to recall one ANU economist back in the 1980s presciently referring to the Dawkins White Paper as a GOSPLAN for higher education.
posted on 21 September 2005 by skirchner in Economics
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Johan Norberg at UNSW
Johan Norberg, author of In Defence of Global Capitalism, will be giving a free lunch time forum at the Australian Graduate School of Management, University of New South Wales, on Wednesday 12 October between 1:00-1:45 pm. The topic for the forum is Why Globalisation is the Cure for Terrorism. RSVP by 10 October: rsvp at agsm.edu.au.
Norberg is profiled here.
posted on 20 September 2005 by skirchner in Economics
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United Nations Reform
Forget John Bolton. Tim Blair has found the man to clean-up the UN.
posted on 19 September 2005 by skirchner in Foreign Affairs & Defence
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Fundamentals of House Price Inflation
An op-ed in the WSJ previews a forthcoming article in the Journal of Economic Perspectives that distinguishes between house prices and the cost of owning:
We, along with Charles Himmelberg, a research economist at the Federal Reserve Bank of New York, computed annual housing costs for 46 housing markets from 1980 to 2004 in a study due to be published this fall in the Journal of Economic Perspectives. Our findings are striking. In none of the hottest housing markets did the ratio of the cost of owning to rent in 2004 exceed the average over the sample period in their own market by more than 13%. The highest was in Portland, Ore. Miami’s ratio was 12% above average. But the ratios in the other oft-cited “bubble” cities such as Boston, L.A., New York and San Francisco were no more than 3% above their long-run averages…
The number one reason the current cost of owning differs so much from the price of a house is the historically low level of real, long-term interest rates. Low rates reduce the yearly cost of financing and lessen the cost of tying up capital in the house. At a lower cost-per-dollar of housing, families are willing to spend more for a house, bidding up prices.
UPDATE: Full paper here.
posted on 19 September 2005 by skirchner in Economics
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A Litany of Failed Doom Mongering
The FT has a very amusing round-up of failed predictions in relation to UK house prices, demonstrating once again the perverse demand for predictions of housing-related economic ruin. The author really nails it when he notes the inability of the commentariat to get their head around the concept of capitalist acts between consenting adults:
And yet house prices continued to defy the reasoning of such commentators. Unlike many other assets, such as gilts or equities - which usually are influenced mainly by professional decisions - housing is an incredibly democratic market. The average price of a home is entirely a function of decisions, sensible or otherwise, by millions of ordinary people buying or selling homes. Should they decide that it is rational to borrow six times their salaries, when renting might be much cheaper, there is little the intelligentsia can do about it.
The author also quotes this very sound advice from the Bank of England’s Mervyn King, which the RBA would do well to heed:
The best way to destroy the credibility of the monetary policy committee is to lecture people about house prices.
posted on 17 September 2005 by skirchner in Economics
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How Much is One Year of Paul Krugman Really Worth?
$49.95 according to the NYT. I’m all in favour of mainstream media charging for content. We need more price signals in the market for opinion. In Krugman’s case, I suspect even his fans would hesitate at giving up a modest amount of green to read a product that has become so absurdly predictable.
posted on 16 September 2005 by skirchner in Economics
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Economic Doom Mongering as Bad Movie Cliché
Is current account and budget deficit angst just a bad Oliver Stone movie cliché? BlogginWallStreet quotes Gordon Gekko in Wall Street:
Well ladies and gentlemen, we’re not here to indulge in fantasies, but in political and economic reality. America has become a second rate power. Our trade deficit and fiscal deficit are at nightmare proportions.
If it was a movie cliché in 1987, it must surely be getting pretty long in the tooth in 2005. Plus ca change…
posted on 15 September 2005 by skirchner in Economics
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10th Anniversary of World’s First Economics Blog
The world’s first economics blog turns ten this month. I’m talking about Morgan Stanley’s Global Economics Forum. The GEF obviously predates blogging as we now understand it, but in retrospect it is clear that blogging is what they have been doing all these years. The GEF is most notable for carrying the work of Robert Feldman, perhaps the best Japan economist in the business.
It is unfortunate that Morgan Stanley chief economist Stephen Roach and Andy Xie have become so preoccupied with ‘bubbles’ in recent years. Andy Xie is increasingly sounding like a hard-money Austrian, with everything reduced to an excess liquidity story that is indistinguishable from the pop Austrian simplification that the business cycle can be reduced to fiat money supply errors. I once thought that ‘bubbles’ were a temporary fallback position for those whose analytical frameworks had failed them, but it is now obvious that, for many analysts, ‘bubbles’ are an all-purpose explanation for everything, devoid of any analytical content.
posted on 14 September 2005 by skirchner in Economics
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