Cranking Up the Wayback Machine on Stephen Roach
Stephen Roach accuses central banks of promoting ‘bubbles’ through excessively accommodative monetary policies. So I thought I would dig up what Roach had to say at the time of the last Fed easing in 2003 (emphasis added):
the key objective for the authorities is to get the US economy back to a sustainable 4% growth pace - and hold it there for several years. That’s the only way the deflationary gap between aggregate supply and demand can be closed once and for all. A temporary growth spurt won’t do the trick, and yet that’s a classic symptom of a post-bubble economy. I continue to fear that a post-bubble US economy plagued by a lack of policy traction will be unable to complete the critical transition from subpar to rapid growth. And that underscores the ultimate risk: A persistence of subpar growth in the current climate could take the US economy further down the slippery slope toward outright deflation.
Once again, financial markets are telling me that I’m dead wrong. The sharp run up in equities speaks of expectations of a sustained upturn in earnings that only a vigorous economy could deliver. The recent sharp sell-off in Treasuries speaks of a bond market that now believes that the Fed has done enough to fight deflation and spark a snapback in the real economy.
Yet, if I’m even close to being right on the economy, the markets could well be blindsided by the next in a long string of relapses.
That’s the problem with Roach: you are either in a ‘bubble’ or a ‘post-bubble.’ The ‘bubble’ paradigm is an all-purpose analytical framework that explains everything and nothing.
posted on 18 June 2006 by skirchner in Economics, Financial Markets
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What Ross Gittins Won’t Tell You (or Just Plain Doesn’t Know) About Cutting Taxes
From Alan Reynolds:
More than a dozen highly regarded studies have shown that the amount of income reported by those facing the highest marginal tax rates is extremely sensitive to changes in those tax rates. This is measured by the “elasticity” (responsiveness) of taxable income…
What all this means is that cutting the top tax rate in half has resulted in much more income being reported and taxed in every country that tried it—the United States, United Kingdom, New Zealand and India, for example. Some mistakenly imagined that proved the rich suddenly became richer when U.S. tax rates fell from 1986 to 1988. What it actually proved was that the rich reported more taxable income when tax rates on an extra dollar became more reasonable. These facts are not seriously in dispute regardless what portion of this widely observed “Laffer Curve” phenomenon was due to a change in actual income (a supply-side effect) or to a change in the proportion reported to tax collectors.
In other words, supply-side economists were right all along. Their critics were wrong. Several Nobel Laureates in economics have now said as much. Get over it.
posted on 15 June 2006 by skirchner in Economics
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Permabears Seek Validation in the Cycle
Markets are sending very strong signals of late. The yield curve inversion in the US and elsewhere, falling stock and commodity prices are all pointing to a weaker global growth outlook. The curve flattening in particular reflects a ‘stagflation trade’ which anticipates central banks overdoing monetary policy tightening to contain inflation pressures.
The permabears have been busy recasting their long-running structural bear call into a cyclical one, hoping the cycle will finally validate them. It is increasingly likely that the cycle will finally oblige them on at least some counts. If nothing else, they have the law of averages on their side. Yet markets have not yet delivered much joy to the purveyors of macroeconomic anti-Americanism. Just ask anyone who followed their advice and bought non-USD denominated asset markets, particularly Asian equities, as a hedge against USD weakness. So far, the USD has been a beneficiary of recent market developments and Asian equities have been crunched. Some hedge!
posted on 14 June 2006 by skirchner in Economics, Financial Markets
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The Wisdom of Crowds and Insider Trading
Henry Manne argues that the success of prediction markets supports the legalisation of insider trading:
The implications of what we already know of this “wisdom of crowds” approach to price formation, as against the traditional marginal pricing/arbitrage approach, are apt to be startling. We should rethink any current policies based on a view of pricing in which we exclude the best-informed traders and discard the wisdom of the many. For instance, we now have a new and more powerful argument than we had in the past for legalizing most insider or informed trading.
Since such trading clearly makes the market process work more efficiently, it aids capital allocation decisions and informs business executives through market-price feedback of the best predictions about the value of new plans. Furthermore, the Supreme Court’s “fraud on the market” theory of civil liability under the federal securities laws and Congress’s ideas of correct civil damage claims for insider trading no longer have any intellectual merit. The same is true of any other part of our securities laws implicitly based on the notion of the marginal trader as a rational arbitrageur of price.
The new approach would suggest that it is undesirable to have laws discouraging stock trading by anyone who has any knowledge relevant to the valuation of a security.
posted on 13 June 2006 by skirchner in Economics, Financial Markets
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Why the Kiwis Have Not Become Tigers
The New Zealand Business Roundtable has released Frederic Sautet’s report, Why Have Kiwis Not Become Tigers? Sautet concludes:
New Zealand has not become a growth dynamo like Ireland because the reforms implemented did not go beyond OECD standard practice. To become tigers, Kiwis must adopt more radical reforms. Unfortunately, the Labour-led government in its 2005 Budget (and in its new incarnation after the September 2005 election) shows little inclination to improve the institutional environment in which entrepreneurial activity takes place. Rather, it prefers to continue increasing the size of government and, through regulation, to tinker at the margin with the rules of the economic game. In the absence of changes, New Zealand’s economic outlook seems likely to be mediocre rather than exciting.
posted on 13 June 2006 by skirchner in Economics
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Ebay and Online Gaming Regulation
Radley Balko on Ebay’s lobbying efforts in relation to on-line gaming regulation:
Thiel and Levchin’s vision for PayPal is long dead. But it lives on in similar, offshore companies like Neteller and FirePay. These companies are safe and reliable (FirePay is traded on the London Stock Exchange), but aren’t subject to U.S. law, and so can be used for all sorts of goods and services the U.S. government has determined Americans aren’t grown-up enough to purchase. The most notable of these is Internet gambling.
Once your money leaves your bank account for a Neteller or FirePay “online wallet,” there’s no way to know how you then spend that money. Your bank doesn’t know you’ve set up an online poker account, or bought a plane ticket or a bottle of wine.
Enter Rep. Goodlatte. Goodlatte’s bill bans the use of financial services to facilitate Internet gambling sites. It’s already illegal to operate a gaming site on U.S. soil. But most experts agree it’s still legal to “place” a bet. Goodlatte wants to put up a wall between the domestic “bet placing” and the offshore “bet taking,” which FirePay and Neteller make possible.
If banks and other financial institutions are going to be responsible for policing what their customers do online, as will happen should Goodlatte’s bill become law, it’s safe to assume that they’ll comply by simply banning all transactions with offshore payment services.
Which means that Goodlatte’s bill’s main effect will be to shield PayPal, a domestic company, from foreign competitors (foreign competitors that, ironically, are doing exactly what PayPal’s founders envisioned).
What’s more, the letter eBay government relations director Brian Bieron sent to Goodlatte announcing the company’s support of his bill actually goes above and beyond what any gambling foes in Congress have called for. Bieron in fact calls for the actual prosecution of Internet gamblers themselves, a policy which could only be enforced by allowing law enforcement officials to essentially begin monitoring everyone’s online activity, including tracing visited websites back to IP addresses.
A law similar to what Bieron is advocating hit the books in Washington State this month. It makes online gambling a Class C felony, on par with child pornography.
The funny thing is, even as eBay has joined Rep. Goodlatte’s moral crusade against gambling, the company’s overseas operations are moving into the gaming business. According to the gaming industry publication igamingnews.com, PayPal Europe has recently entered into agreements with two online gambling services to allow PayPal to be used by Europeans who want to gamble online.
Industry insiders estimate that as much as 4 percent of the U.S. population participates in online gambling. That’s about 12 million people. It’s likely that a good percentage of those 12 million active, online users also patronize eBay. I wonder what they’d think if they knew that eBay has called for them to be arrested and prosecuted?
posted on 11 June 2006 by skirchner in Economics
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Digesting Dow 36,000
Dan Gross eats James Glassman’s words - literally.
posted on 11 June 2006 by skirchner in Economics
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What Kind of Bird is That?
Bird-watching with James Hamilton:
What does Bernanke really believe? Well, for starters, that:
“the evidence of recent decades, both from the United States and other countries, supports the conclusion that an environment of price stability promotes maximum sustainable growth in employment and output and a more stable real economy.”
That’s what he believes, that’s what he’s going to do, and you can take that to the bank. If that makes him a “hawk” in your book, so be it. But he also has no desire to plunge the U.S. unnecessarily into a recession. So then he’s really a “dove”? Then the limitation is in the vocabulary with which you’re determined to describe him, not in the quality or consistency of his ideas.
Some people find that level of complexity unsettling. But personally, I prefer to have the U.S. Federal Reserve run by a human rather than a bird.
posted on 11 June 2006 by skirchner in Economics
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Bernanke and Inflation
No one ever accused Allan Meltzer of being soft on inflation:
Allan Meltzer: I think the best measure of Mr. Bernanke’s credibility is the bond market, and there is no sign there that traders expect big inflation or even much inflation.
There are enough anti-inflationists at the Fed that even if Mr. Bernanke were mild on inflation—and I don’t think he is—there would not be a majority supporting that position. So I don’t think inflation-fighting credibility is Mr. Bernanke’s problem.
posted on 09 June 2006 by skirchner in Economics
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A Not So Tragic Current Account Deficit
Opposition Treasury Spokesman Wayne Swan piles on the hyperbole following the release of the Q1 current account deficit:
“I think it is a matter of national tragedy that, given we have a global commodities boom and the best trading conditions in a generation, that we are importing into this country more then [sic] we are exporting,” he said.
If this is a national tragedy, it is a long running one, since Australia’s balance on goods and services has averaged -1.1% of GDP since 1960, little different from the -1.8% of GDP seen in Q1 2006.
Now that the current account deficit is actually narrowing, the sub-editors have switched their attention to record foreign debt levels for their headline grabs. Record foreign debt levels should be no more newsworthy than the record levels of exports of goods and services that go with them: both series are subject to a secular expansion. Press releases announcing record exports each financial year are a favourite trick of National Party trade ministers, who can practically write the press release a year in advance. All you have to do is fill in the export numbers.
What matters is the ratio of net foreign debt to exports, which as the chart below shows has been steadily narrowing since the early 1990s. Another reason I don’t lose any sleep worrying about current account deficits.
posted on 07 June 2006 by skirchner in Economics
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FDI Protectionism: Australia Gets Some of its Own Back
One of the great success stories of the Australian economy that we have sought to highlight on this blog has been the rise of Australia as a net exporter of direct investment capital, a reflection of the globalisation of Australian business. As this story notes, Australia is the eighth largest investor in the US, with leading Australian companies like Macquarie Bank, BHP Billiton, Santos, Woodside, Westfield, Rinker and Visy owning more than $US130 billion in assets and employing more than 80,000 people in the US.
Given Australia’s sorry record of FDI protectionism on spurious national interest grounds, often at the behest of local producer interests, there is a certain justice in Australian firms now being on the receiving end of similar protectionist sentiment in the US. As the story cited above notes:
AUSTRALIA might have a free trade agreement with the US but it hasn’t stopped this country being caught in an outbreak of xenophobia towards foreign investors, particularly Macquarie Bank…
The multi-billion-dollar leases for toll roads in the US that Macquarie is acquiring with its Spanish partner Cintra appears to be falling into the definition of “critical infrastructure” that some congressional members want foreigners banned from buying.
The notion that Australian ownership of US infrastructure poses a threat to the US is absurd, but no more so than similar arguments routinely run in the Australian context. The Australian government proposed to limit foreign ownership in the Snowy Hydro privatisation before the whole thing collapsed amid an outbreak of nationalism and parochialism that would shame even Pauline Hanson. Australia runs one of the most restrictive FDI regimes in the OECD and the US-Australian FTA left in place sweeping ministerial discretion over foreign investment in Australia.
FDI protectionism is a silly game to play, especially on the part of firms with global business interests and economies dependent on foreign investment to finance their current account deficits.
posted on 05 June 2006 by skirchner in Economics
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Snowy Hydro: Myth versus Reality
Myth:
‘This is an unique piece of infrastructure with a cultural ethos,’ said Bernie Fraser, governor of the Reserve Bank of Australia between 1989 and 1996, and whose father Kevin worked on the Snowy. ‘The plan to sell related around short-term fiscal gains, and that is mad ideology for this icon,’ he said in an interview.
Reality:
The Snowy Hydro electric scheme is no more iconic than the Loy Yang power station, the national phone network or even the TABs. In withdrawing it from sale the Government has capitulated to the paranoid and cynical campaigns of vested interests.
As discussed in this column two weeks ago, Snowy Hydro is, in fact, an investment bank - selling derivatives and insurance products to the electricity industry. It is not even really a power company and certainly not an iconic one. The “vast majority” of its revenue, according to the company, comes from investment banking activities, in competition with investment banks.
posted on 03 June 2006 by skirchner in Economics
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M3 Revisited
I suspect very few of the fever swamp Austrians and tin foil hat brigade who lamented the demise of M3 ever actually made any serious use of these data. Not that they would get much out of it even if they tried, as James Hamilton argues:
I have to confess that in a quarter century of teaching and research, I never had any occasion to make use of M3. It always seemed to me that this unambiguously failed the definition of an asset that is used to pay for transactions. If you’re going to include such assets in your concept of “money”, why stop there? Don’t you want to include T-bills as well, and if them, why not Treasury bonds? You have to stop somewhere, and I always stopped with M1 or M2.
In addition, a primary reason for focusing on the money supply for policy purposes is that it’s a magnitude controlled by the government. The physical dollar bills are of course printed by the government, and a bank that issues checking accounts must hold credits that could be used to obtain physical dollars (known as Federal Reserve deposits) in a certain proportion to the value of the outstanding checkable deposits. However, it is unclear how the government is supposed to control the M3 components. Balances at foreign banks, for example, are clearly outside the control of the U.S. government.
I was thus a bit surprised at the brou-ha-ha that erupted over the Fed’s decision to discontinue requiring banks to provide the data that was used to calculate some components of M3. These concerns continue to bubble up in comments from Econbrowser readers.
I’m aware of no evidence suggesting that M3 helps predict U.S. inflation or economic activity better than M2.
I discuss the extent to which we should be concerned with broad money aggregates in my review of Tim Congdon’s, Money and Asset Prices.
posted on 01 June 2006 by skirchner in Economics
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Libertarian Party Member Advisory
Tin foil hats don’t work! (via TB)
posted on 31 May 2006 by skirchner in Politics
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Ben Bernanke: Soft on Inflation or Tough on Deflation?
The notion that Fed Chair Bernanke is somehow soft on inflation still has considerable resonance in financial markets and has been used to rationalise everything from rising commodity prices to USD weakness. The sole basis for this reputation is a couple of speeches Bernanke gave amid the 2002-03 global deflation scare, in which Bernanke made the simple observation that the Fed had quantitative tools available to it in the event that the zero bound became a binding constraint on the Fed funds rate.
This was little more than a straightforward application of the quantity theory of money and one that Milton Friedman would find unobjectionable (Friedman advocated an identical policy approach in the Japanese context). No one ever accused Friedman of being soft on inflation. It would be more accurate to say that Bernanke is tough on deflation. His preferences over inflation are appropriately symmetrical.
Stephen Jen is right when he says that:
The ‘credibility problem’ of the Fed is exaggerated: the complaint against the Fed is everywhere except in the bond prices or market indicators. As long as the Fed continues to tighten, the dollar will struggle to sell off.
James Hamilton examines the M2 data and finds little evidence of runaway inflation there either:
such money growth would not be expected to produce the sort of runaway inflation that some commentators think they detect in commodity prices. Furthermore, the 5% M2 growth rate of the last three years would be the sort of thing to get the economy back on track to a 1.5% inflation rate.
Obviously M2 is a pretty noisy indicator if you have to look to 10-year averages, and even then be careful. Nevertheless, it confirms a picture that I think emerges from any of a number of other indicators: the Fed was a little too aggressively expansionary a few years ago. That may have been responsible for a slight increase we’re seeing now in current inflation. However, the more restrictive measures adopted by the Fed over the last three years should help keep future inflation at acceptable levels.
Meanwhile, RBA Deputy Governor Stevens (adopting the broad historical perspective of his boss) addresses the so-called bond yield ‘conundrum:’
Against the backdrop of the past century, on the other hand, recent levels of long-term US interest rates do not look especially low; they look quite within the range of historical experience, especially experience when inflation was low. The 1970s and 1980s look more like the outlying period. Nor have spreads, for US corporate debt at least, been all that low when viewed from this longer perspective. There were lengthy periods in the mid part of the 20th century when spreads were as low as or lower than they are today.
Stevens also addressed the subject of global imbalances after his speech, in comments reported here:
“I perhaps have a slightly different view to much of the conventional wisdom here.
“I think that in the past decade the behaviour of the US has actually been stabilising for the global economy.
“I think to no small extent the rise in the US deficit was a lot to do with a rational response on the part of Americans to changes in prices.
“If it was really the case that the US was dragging this capital out of a world economy that was reluctant to give it, the price would have gone up. But the price didn’t go up, it went down.
“The quantity rose and the price fell - the supply curve moved.
“I think one might say it was a good thing that the Americans and others were prepared to use that capital because that kept the global economy going a lot better than it would have if things had been different.
“That isn’t to say that all of that can go on indefinitely. It can’t.”
If it’s not the conventional wisdom, then it should be. Strangely, Bernanke has also suggested that his global saving glut thesis is unconventional, yet it strikes me as an entirely orthodox position. It is those who persist in fretting about imbalances in a world of floating exchange rates and international capital mobility who are outside the bounds of contemporary macroeconomic thought.
posted on 29 May 2006 by skirchner in Economics
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