Kirchner the ‘Cornucopian’

Via my server stats, I found this rather amusing link to Institutional Economics:

Skirchner seems well-educated, a good writer, and glowingly optimistic. Yet within the span of a few posts, beginning with his January 24th “The Doomsday Cult Comes to Reno,” Skirchner says “Warren Buffet is sounding more and more ridiculous,” “Stephen Roach is having trouble getting his colleagues and clients to take him seriously,” “PIMCO’s Bill Gross [is] keeping the doomsday cult alive,” and “The Economist has a tired and predictable piece on Greenspan’s legacy.” All of this, and likely more on his blog pretty much contradicts all of what I post here.

Maybe Skirchner and others can help me to see the world differently, or at least to better understand how those I call “Cornucopians” can be so glowingly optimistic.

I’m here to help!  But if Bretton Woods era economics is really more your thing, you can always go check out Brad and Nouriel, the Stadler and Waldorf of international macro.

As far as the contrarian optimist versus doomsday cult scorecard goes, Kevin Hassett notes that Q1 GDP growth in the US is shaping up as a boomer (and yes, I know about the weather.)

posted on 22 February 2006 by skirchner in Economics

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Two New Australian Academic Economist Blogs

I have been remiss in not linking earlier to two new blogs by Australian academic economists: Joshua Gans and Harry Clarke.  You can still count on one hand the number of Australian academic economists who blog (I would even exclude myself from the list, since I do not hold a full-time academic position).  This is in sharp contrast to the economics faculty at George Mason University, most of whom seemingly engage in blogging in one form or another.  This is indicative of the fact that the GMU faculty are among the world’s most interesting academic economists. 

Gans constructs a purchasing power parity index based on iTunes prices, which confirms what many Australian iTunes users probably already suspect:

apart from Canada, iTunes songs are priced at a premium in other music stores. This echoes my observations about the Australian iTunes music store in The Age (4th November, 2005) where I noted the substantially higher prices for all iTunes products (if they were available) in Australia as compared with the US.

It is amazing that for all the talk about globalisation, such price discrimination remains viable, exploiting simple things like the lack of effective cross-border markets in retail financial services.  Many of the things that are commonly assumed to be thoroughly globalised are anything but.

posted on 21 February 2006 by skirchner in Economics

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The Ultimate in ‘Downshifting’

Proving that you can make anything fashionable in the name of environmental awareness, the neo-socialist Australia Institute identifies the latest in inner-city environmental trends, ‘skip-dipping:’

IT IS supposed to be the domain of the destitute and desperate, but scavenging through other people’s rubbish is emerging as a favourite pastime of well-heeled city dwellers.

Interviews by the Australia Institute conducted between December and February revealed that people of all ages and from all walks of life, including computer programmers, designers, public servants and retirees, do their shopping in other people’s bins.

Scavenging through other people’s garbage is a logical extension of the ‘downshifting’ to a less affluent lifestyle favoured by the Australia Institute.  Indeed, if the Institute were ever to get its way, many more people could look forward to living out of garbage bins, although more out of necessity than environmental awareness. 

(via Catallaxy)

posted on 18 February 2006 by skirchner in Economics

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The RBA’s Policy Bias

In a rare display of insight on the part of a member of the House Economics Committee, Craig Emerson questioned RBA Governor Macfarlane on differences in the Bank’s presentation of its policy bias in his prepared testimony to the Committee compared to the Statement on Monetary Policy earlier in the week.  Macfarlane denied there was any difference, arguing that the two presentations were intended to be the same, although he also noted that the statements had two different authors.  Financial markets took a different view, with the Australian dollar rallying and bond futures selling-off after the delivery of his Committee testimony, implying that the market thought there was a change in emphasis.

This episode confirms my view that the RBA does not give as much thought as it should to the presentation of its policy bias and its statements are over-interpreted relative to the thought the Bank puts into them.  It seems incredible to me that a backbencher could discern a key difference in presentation that was not apparently discernable to the Governor of the Bank.  Consistency in communication has never been the Bank’s strong point.  The Statement on Monetary Policy is a misnomer, since most of the document studiously avoids any discussion of the policy outlook.

posted on 17 February 2006 by skirchner in Economics

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Sydney and the Rest: Convergence in House Prices

Yesterday’s RBA Statement on Monetary Policy included the following chart, showing the ratio of Sydney to other capital city house prices, using the composition-adjusted APM series:

The chart suggests the possibility of a long-run equilibrium relationship between capital city house prices.  Note that the adjustment is coming from both sides:  Sydney house prices are falling, while those in other capital cities are still rising, in some cases quite strongly.  As noted previously, those capital cities benefiting most from the commodity price boom are still experiencing strong house price growth.  Since the boom in commodity prices is exogenous to the Australian economy, this implies that it is broader economic developments that are driving house prices, not the other way around.  Internal migration is also likely to be a factor in driving convergence.

Previously, we have also noted that the global price shock to residential property as an asset class invalidated attempts to explain national house prices with reference to country-specific factors, such as changes in capital gains tax.  This chart also implies that these simplistic mono-causal explanations are also invalidated from the bottom-up.  The national story obscures what is happening on a state-by-state basis.

posted on 14 February 2006 by skirchner in Economics

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Why Central Banks Should Not Burst ‘Bubbles’

An IIE Working Paper by Adam Posen, arguing that monetary policy should not seek to burst asset price ‘bubbles.’  While I would reject Posen’s assumption that markets can be meaningfully characterised as experiencing ‘bubbles’ (and Posen himself notes some of the real factors that give rise to so-called bubble behaviour), his bottom-line is essentially correct:

Bubbles generally arise out of some combination of irrational exuberance, jumps forward in technology, and financial deregulation (with more of the second in equity price bubbles and more of the third in real estate booms). Accordingly, the connection between monetary conditions and the rise of bubbles is rather tenuous, and by raising interest rates a central bank is unlikely to achieve what is needed—i.e., persuading investors that the bubble is ill-founded and/or that they will not find some greater fool to sell to in time. More important, the cost of bubbles bursting largely depends upon the structure and fragility of the economy’s financial system. A properly supervised and regulated financial system—or one with more securitized and liquid markets than bank-dependent—will not suffer much in real terms from a bubble expanding and bursting. If the financial system is fragile or improperly supervised, then monetary tightening will be even more costly in real economic terms, but such tightening in no way substitutes for directly dealing with the underlying financial problems.

The lack of monetary tightening’s effectiveness to pop bubbles or to respond to financial fragility and the far greater cost of inducing recessions than riding bubbles out are structural factors characteristic of modern financial systems and bubbles. The cost-benefit analysis inherently goes against popping bubbles and in favor of monetary easing after busts because there is an asymmetry in the way investors and financial intermediaries behave in the two situations. In the end, no amount of monetary discipline can substitute for lack of proper financial regulation and supervision.

posted on 12 February 2006 by skirchner in Economics

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De-Monetisation of Copper

Never mind the supposed ‘re-monetisation’ of gold, what about the de-monetisation of copper.  The price of copper is now so high that the copper content of small denomination coins may now exceed their face value.  Larry White points to the case of Korea, which is suffering from reverse seignorage:

The production cost of a W10 coin is about W40, W14 of that for copper and zinc alone.

Australian coins are 75-92% copper, although we wisely took smaller denomination coins out of circulation years ago.

posted on 10 February 2006 by skirchner in Economics

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Meta Prediction Markets

A prediction market in prediction markets.

posted on 08 February 2006 by skirchner in Economics

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More Gold Buggery

One of the reasons why it is hard to take gold bugs seriously is that much of the hype around gold seems to be linked to the selling of gold stocks.  A number of people have pointed me in the direction of this report from the Cheuvreux broking house, which contains this rather bullish forecast under the heading ‘Remonetisation of Gold: Start Hoarding’:

We also believe that there is a reasonable chance that we could see the gold price
spike up much further, possibly to USD2,000/oz or even higher.

The report is a good summary of the gold bugs’ rather conspiratorial worldview, but I find very little of it convincing, for reasons articulated in previous posts.  Remarkably, the report argues that both inflation and deflation are good for the gold price, so gold seemingly can’t lose.  It is also quite possibly the longest buy recommendation for a gold stock (specifically, Anglo-American) ever penned.

posted on 07 February 2006 by skirchner in Economics

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What Does the Gold Price Tell Us?

The 25 year highs in the nominal gold price have seen the gold bugs out in force.  It is often claimed that gold has special properties, either as a leading indicator of inflation or the stance of monetary policy.  Yet gold’s correlation with commodity prices in general suggests that it has no special properties in this regard.  The following chart shows the USD gold price, alongside an index of base metal prices in USD terms:

The most that could be said for gold is that there have been episodes where the gold price has led base metal prices.  As an indicator of the business cycle and inflation pressures, base metal prices would seem to be a better coincident indicator, which follows logically from their use in a much wider range of industrial applications.  Even gold’s role as a store of value is not entirely unique, since base metals are also subject to inventory cycles and inter-temporal arbitrage. 

The next chart shows gold alongside the Fed funds rate:

Again, gold would seem to lead Fed funds, although one could just as easily argue that the Fed funds rate is a lagging indicator of the business cycle!  If we are to take gold seriously as an indicator of the stance of monetary policy, then we would have to argue that policy was too tight from the mid-1990s through to the early 2000s, contrary to what is indicated by base metals prices.  This would argue against the notion that monetary policy was accommodative during the late 1990s equity market boom. 

There are of course those who argue that the gold price was being artificially suppressed by official sector gold sales during the late 1990s and early 2000s.  If one thinks that a market price is being manipulated in this way, then this is an even stronger argument for not using it as an indicator.

posted on 04 February 2006 by skirchner in Economics

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There Are Worse Things than Debt

The AEI’s John Makin has an interesting discussion of low bond yields that attempts to put the ‘condundrum’ in a structural setting.  His discussion of the relevant fundamentals argues against any ‘bubble’ characterisation, but Makin can’t help throwing this non-explanation into the mix as well, ‘bubbles’ being an all-purpose theory of everything and nothing in relation to asset prices.

Makin argues that bond yields are now so low, that governments should start looking to debt financed tax cuts, on the grounds that the welfare costs of current marginal rates are so high as to make debt finance look cheap by comparison:

Imaginative treasury secretaries and finance ministers should take note of another opportunity offered by the extraordinarily low borrowing cost that can be obtained by issuing long-maturity inflation-indexed debt. Governments should consider a debt-financed investment in a transition to lower and more uniform marginal tax rates that many studies have shown would result in an increase in long-term growth rates of up to one half of 1 percent. For a $12 trillion economy like the United States, one half of 1 percent is $60 billion a year, measured in current dollars. The present value, again measured in current dollars, of $60 billion per year given a 2 percent real interest rate used as a discount rate, is $3 trillion. Therefore, even if a move to lower and more uniform marginal tax rates entailed transitional costs of several hundred billion dollars, it could still constitute a good investment for most governments.

This does not account for any negative wealth effect associated with a higher future tax burden, which is why I think it is preferable to finance tax cuts out of current government spending.  But Makin’s suggestion highlights the extent to which conservative and libertarian think-tanks have changed their tune in recent years.  In the 1970s and 1980s, these think-tanks spent much of their time criticising lax fiscal and monetary policy.  These days, the same think-tanks are much more forgiving.  Although Makin seems to have difficulty deciding whether he is a monetary policy hawk or dove from one month to the next, it is now commonplace for those at conservative and libertarian think-tanks to fret over the possibility that the Fed is overdoing its tightening effort.  It shows what a different world Greenspan leaves behind compared to the one he started with.

posted on 01 February 2006 by skirchner in Economics

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Friedman on Greenspan

Milton Friedman on Alan Greenspan:

Over the course of a long friendship, Alan Greenspan and I have generally found ourselves in accord on monetary theory and policy, with one major exception. I have long favored the use of strict rules to control the amount of money created. Alan says I am wrong and that discretion is preferable, indeed essential. Now that his 18-year stint as chairman of the Fed is finished, I must confess that his performance has persuaded me that he is right—in his own case…

It has long been an open question whether central banks have the technical ability to maintain stable prices. Their repeated failures to do so suggested that they did not—whence, in part, my preference for rigid rules. Alan Greenspan’s great achievement is to have demonstrated that it is possible to maintain stable prices. He has set a standard. Other central banks around the world, whether independently or by following his example, are following suit. The timeworn excuses for central bank failure to stem inflation will no longer do. They will have to put up or shut up.

posted on 31 January 2006 by skirchner in Economics

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Endogenising Alan Greenspan

With Alan Greenspan presiding over his final FOMC meeting today, John Berry defends his legacy against the self-indulgent puffery of The Economist:

Suppose the Fed, with an eye on the stock market, had raised rates instead. What would have happened? No one knows, of course. When one is constructing what economists call a counter-factual - - that is, an alterative scenario to what actually happened—such questions have to be addressed, and few if any of the Greenspan critics have bothered to do so.

The critics nevertheless assume that minor rate increases would have done the trick.

This is a key problem confronting Greenspan’s many critics.  It is the average level of real interest rates relative to a notional equilibrium rate over many months, if not years, that determines the effective stance of money policy.  It would have taken a very different path for the Fed funds rate to make a material difference to macroeconomic outcomes.

The Fed makes only marginal changes in interest rates, not because given 25 basis point moves are particularly important, but as a hedge against being wrong.  Unfortunately, these incremental moves lead many people to greatly exaggerate the importance of monetary policy.  It is also much easier for people to get their head around the idea of the economy responding to single influence, especially one seemingly subject to human control.  In reality, monetary policy is as much an endogenous response to prevailing economic conditions as a determinant of them.

posted on 31 January 2006 by skirchner in Economics

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Schmoozing in Davos

Vanguard’s John Bogle, heaping derision on the great and the good assembled at Davos:

This year I’ve decided not to call the pilot, pop on to Vanguard’s G-4 and jet to Davos. Partly because we don’t “do” corporate airplanes…I confess I looked at this year’s program before I made my decision. I’m only truly sorry to miss Morgan Stanley’s Steve Roach, whose persistent gloomy warnings about the global economy have yet to come home to roost.

By contrast, doomsday cultist Nouriel Roubini is completely star-stuck:

Hopefully, one will also have time to schmooze with celebrities: this year Angelina Jolie is not around as she is pregnant to Brad Pitt but a stable of glitterati, glamoratas, artistata and hollywoodatas is certain to add glamour cachet to the highest concentration of gurus, eggheads, policy wonks, corporate leaders, net geeks and nerds and movers&shakers ever put together…

Cringe!

UPDATE:  Another failed Roubini forecast:  ‘Jolie tells starstruck summit to stay focused’

DAVOS, Switzerland (Reuters) - Angelina Jolie told a summit of business leaders and politicians, many driven to distraction by the Hollywood siren, to concentrate on the real issues.

The Oscar-winner and her beau Brad Pitt, whose child she is carrying, have reduced the global elite at Davos to star-struck autograph hunters, scrambling over each other to get a glimpse of the actress and her man.

UPDATE II:  Italy’s Economy Minister tells Nouriel where to go.  I happen to agree with Nouriel on EMU, except that I don’t see its prospective break-up as a ‘disaster.’  Still, it makes Nouriel’s bearishness on the USD all the more curious.

posted on 27 January 2006 by skirchner in Economics

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Flying on One Engine:  The Bloomberg Book of Master Market Economists

Flying on One Engine: The Bloomberg Book of Master Market Economists contains 14 essays by leading market economists on the US and world economies.  Economists working in financial markets produce some of the best analysis of contemporary macroeconomic developments, yet much of this research is only ever seen by wholesale clients.  While many economists enjoy high media profiles, the relentless dumbing-down of reporting on the economy and financial markets makes it difficult for some of the better economists’ voices to be heard.  Anyone looking for more considered analysis of economic and market developments that goes beyond the one line grabs in the mainstream media will find this book of interest.

The essays represent a range of views on the US and world economies, but remain largely ‘bubble’ and doomsday cult free.  David Malpass is typically upbeat in his essay ‘America’s Optimistic Future,’ demolishing the myth that US households don’t save and dismissing the notion of a ‘bubble’ in US housing. 

Thomas Mayer is suitably downbeat in his essay ‘Europe’s Political and Economic Future,’ concluding that ‘whether the readers of these lines will live to see Europe’s economic revival is an entirely different matter.’

John Ryding’s essay ‘Monetary Policy, Wicksell and Gold’ argues for a Wicksellian interpretation of US monetary policy at the expense of what he sees as the dominant Phillips curve paradigm.  Ryding fails to appreciate the extent to which US monetary policy is already firmly neo-Wicksellian and that the Phillips curve trade-off, however unreliable, is not necessarily incompatible with a neo-Wicksellian interpretation of monetary policy.

Ryding is one of several authors who point to the gold price as being indicative of the stance of US monetary policy.  The problem with this view is that gold is correlated with commodity prices in general, so it is far from obvious that it has any special properties as an indicator relative to other commodities.  David Rosenberg’s essay highlights the very restrained pass through of the recent bull market in commodity prices to producer and consumer prices, suggesting that commodity prices (including gold) are now a much less reliable guide to inflation pressures than they have been in the past.

Michael Rosenberg writes on US dollar cycles, arguing for a 20 to 30 decline in the US dollar’s value over the next two to three years.  However, Rosenberg is also sympathetic to the possibility that there has been an increase in the ‘sustainable’ current account deficit for the US, implying greatly reduced downside for the US dollar to restore external ‘balance.’  Indeed, there are those (like myself) who argue that the US current account deficit should if anything be wider, and that the recent deterioration in the current account balances of the Anglo-American economies contains a significant structural component that is here to stay.

The book’s only major flaw is the gushing and cringe-inducing introductions that editor Thomas Keene inserts at the beginning of each essay.  The biographies of the contributors speak for themselves and hardly require any embellishment from Keene.

posted on 27 January 2006 by skirchner in Economics

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